“Living Benefits” Annuity May Be Riskiest Product Ever Sold by Insurance Industry

Variable annuities that guarantee “living benefits” could end up costing insurers a lot more than what they charge for them and may result in falling stock prices. These variable annuities come with a GMWB (guaranteed minimum withdrawal benefit). An investor’s money is placed in various mutual fund-like “sub-accounts” in return for a guaranteed minimum payout, as well as a higher return if your mutual funds’ values increase by over a certain amount
This means that even if a buyer sustains significant losses on an investment, he or she must still receive the fixed, minimum income benefits that were promised. It is also important to note, however, that there may not be an increase in future benefits.

Last summer, variable annuities became even more attractive to investors, as insurers competed with one another to generate more business. This move, however, is not boding well for insurance companies.

Fitch, AM Best, Standard & Poor’s, and Moody’s have all placed the life insurance industry in their “negative-outlook” columns. Even if insurers increase their prices or lower future guarantees, these moves may not suffice to cover the benefits they have promised.

Many GMWB annuities buyers had anticipated not having to withdraw from their annuities for a number of years, until their value had increased enough to pay more than the $5,000 annual minimum. Now, this won’t be possible until the annuity recovers everything lost plus yearly costs.

Related Web Resources:

Annuities fairly safe but insurers hurting, Dallasnews.com, December 3, 2008
Maximum Risk Didn’t Hurt These Investors, Bloomberg.com, December 3, 2008

The Cost Of Variable Annuity Guarantees, Investopedia.com
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