The offer sounds so good: Invest in a basket of tax-deferred mutual funds, but if you lose money don’t worry because we’ll guarantee you 6 percent growth per year regardless of what the market is doing. In other words, be aggressive and if it doesn’t work out, we’ve got your back. This provocative sales story plays out every day in banks, credit unions, and financial advisor offices around the country.
Unfortunately, even the best-laid plans don’t always go quite as expected. Recently, these abundant “guarantees” offered by some variable annuity companies have become, well, too good to be true.
Is There Gold In Your V.A.?
Due to the low-interest-rate environment, poor investment performance, and some suspicious math, some variable annuity carriers have discovered that their death benefit and earnings benefit guarantees are not actuarially sound. This discovery has led several companies like AXA Equitable and TransAmerica to offer a cash deal if you let them off the hook for their original promise.
You’ve read that right. Some variable annuity companies have turned into a virtual pawn shop by offering variable annuity owners an escape hatch. If you don’t hold them accountable for the “guarantees” they made they will actually “pay" you to undo the promise by trading in the contractual guarantees for an increase in your account value. Why would they do this? Simply because they cannot afford to honor the original death benefit and earnings benefits and, as AXA put it in a September letter to annuity owners, “because providing these features are costly in this environment.”
Take The Money and Run?
If you’ve received an offer to surrender the guarantees from a variable annuity company, you may be wondering if it’s a good deal for you. Here are a few things to keep in mind:
- Prioritize. What’s more important to you? Having money in hand (an increase in account value) or a death benefit?
- Get A Checkup. How’s your health? If you’re on your last leg it would certainly seem obvious to keep the death benefit, but if you’re younger and fit as a fiddle then maybe you should consider accepting the offer.
- Consider Fees. By accepting the offer to let the company relinquish their promise(s) to you, one advantage is that you no longer have to pay the hefty fees for the guarantee benefits.
- A Better Option? Can you redeploy your capital into a better, more cost-effective strategy?
I’ve never seen offers like these before, but I suspect there will be plenty more to come as the yields on insurance company portfolios continue to dwindle.
Robert Russell is the author of Retirement Held Hostage, CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to The Wall Street Journal, SmartMoney, & FOX Business.