Why Are Annuity Companies Buying Back Benefits?
Question: I own a variable annuity and recently received a letter from the insurance company offering me cash to buy back my contractual benefits. Why are they doing that? – Phil from Indiana.
Answer: I bet you weren’t expecting that letter, huh Phil? This current “buy back bonanza” is primarily happening with variable annuity carriers, but don’t be surprised if fixed indexed annuity carriers start doing the same thing in the near future.
Here’s the scary part, the reason that these insurance companies are trying to buy back the guarantees is because they think they will not be able to actuarially back up those contractual promises in the future. Companies like Hartford, AEGON, AXA, and Transamerica have aggressively tried to buy back their living benefits like lifetime income guarantees. The million dollar question is, should you take the offer?
This is where the rubber meets the road in my opinion. There is no perfect answer to this question. On one side, if the contractual benefit is so rich that they are trying to buy it…..shouldn’t you keep it? The devil’s advocate would say, if they are trying to buy the benefit back then that might be a red flag that something could be financially wrong sooner or later with the carrier from a safety standpoint.
It’s important to understand that annuities are regulated at the state level (www.nolhga.com) and each state has a guarantee fund that backs annuities up to a certain level. However, the benefits that these carriers are trying to buy back ARE NOT covered by state guarantee funds. All that is covered is the accumulation value. For variable annuities, the accumulation value is the mutual funds (aka: separate accounts). For fixed indexed annuities (sometimes incorrectly called hybrids), that covered amount is the index option side….not the income rider calculation.
Currently, I am advising people to keep the annuity benefit in place and not take the buyback offer. My theory on this is that a lot of people will take the cash, and the ones who stay will be OK. Hope I’m right on this, and again, there is no right answer……so I encourage you to go with your gut feel at the end of the day.
As interest rates continuing to remain at historically low levels for the foreseeable future, these “buybacks” will continue because insurance carriers are all about risk management…….primarily theirs. If you would like for me to take a specific look at your buyback situation, please contact me and I will give you my 25 years of experience on this for free. At the end of the day, my goal is for annuities to work for everyone……even during weird and unexpected “buyback” times like these.
Originally published by Annuity123.com 5.30.2013 – http://blog.annuity123.com/why-are-annuity-companies-buying-back-benefits/