Insurance Companies Experiencing Sellers’ Regret Over Variable Annuities

According to The New York Times, a number of insurance companies that sold variable annuities with healthy death or income benefits prior to the financials crisis are regretting this decision. One reason for this is that they are finding it hard to meet the obligations-payouts of at least 6% or guaranteed returns-that come with them.

Now, some insurers are currently trying to get annuity owners to agree to buyouts or move into investments that have lower returns. In some cases, the penalty for not complying is the loss of the payment that was guaranteed to them. Unfortunately, says The Times, the notice of these changes and potential ramifications are not being made explicitly clear to annuity owners, who may be hearing them via generic-seeming notices sent in the mail that don’t show no indication that the letter might be urgent.

One company, The Hartford, has notified advisers and clients that they have until October to change the asset allocation in specific variable annuities. This is to decrease the balance of the client, which would lower how much the company has to pay out. Rather than a 5% lifetime guaranteed payout, the annuity’s owner would receive a lower payout according to a decreased account value. Failure to comply will result in the loss of the rider that guaranteed payment no matter what the annuity’s value in cash. (A spokesperson for The Hartford, which is exiting the annuities business, said that the investment changes only apply to owners with contracts where such changes are allowed.)

It is important to note that the changes that insurance companies are making to these variable annuity arrangements are legal and within the company’s contractual rights. Unfortunately, because such contracts tend to pay hundreds of pages long, most people don’t read them so they don’t know that this can happen. Consumers that have signed these contracts don’t have much choice but to go along. They can either lose the benefit they’ve been paying for or move to an asset allocation that isn’t as aggressive.

It doesn’t help that annuity owners might not comprehend the buyout offer even when notified. Even if no rider changes are made, contract provisions can be harmful to an annuity owners’ financial goals if he/she doesn’t understand the terms.

Variable Annuities
Often found in investment and retirement plans, a variable annuity is a contract between an individual and insurer involving the latter agreeing to pay you periodically either for a set amount of time or either for the duration of your life or your spouse’s life. In exchange for your payments, the insurer starts to pay you either right away or at a determined, set date. You can opt to invest the payments in different kinds of investments.

Variable annuities have a death benefit, which means that if you die before you start to get the payments, your beneficiary will get a definite amount, even if it is just how much you paid to buy the annuity. Because variable annuities are tax-deferred, you don’t pay tax on investment gains or the income from the annuity until you take your money out.

If you believe that you sustained losses because you were misinformed or misled about variable annuities that you purchased, please contact our variable annuities fraud lawyers at Shepherd Smith Edwards and Kantas, LTD LLP today.

That Bland Annuity Notice May Be Anything but Routine, New York Times, July 13, 2013

Variable Annuities, SEC
The Hartford To Sell Its U.K. Variable Annuity Business For $285 Million, The Courant, June 27, 2013

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