When people find out I’ve been writing a blog about personal finance for ten years — yes, it seems crazy, but the tenth anniversary of Consumerism Commentary is Tuesday — they recognize it is an opportunity to share their financial troubles and triumphs. I’m a good listener. For the most part, I am happy to hear what others have to say but will only reluctantly share my opinion about the choices they’ve made. I usually don’t.
And there was one common thread through the recession. People bought annuities. The sales pitch from their brokers probably went like this. “Listen. We’ve lost money, like the rest of the market. But if we move a portion of your assets into variable annuities, you’ll have protection. With this type of investment, you will earn a minimum of 6 percent on your money each year, and when the stock market performs better, you can earn more. And you’ll have a steady stream of income, a good idea with a volatile market.”
It’s hard not to hide the happiness that comes from earning a very good return on your investments when the media continues to talk about trouble in the stock market. The recession continued, and those who bought into variable annuities may have received statements showing a 6 to 8 percent annual return. Not bad at all, and those seeking my approval should be happy to know that I’m all in favor of good returns.
Annuity purchasers are starting to see exactly what it took to provide returns better than the overall market. Although this was always a risk, the broker might have swept it under the rug: the insurance companies offering variable annuities are now taking advantage of the fine print that allows them to change the rules.
Prudential made the news last year when they controlled benefit payouts for their annuities by refusing new contributions. If the annuity was purchased under the assumption that the investor could continue to contribute over time and benefit from increased payouts based on the balance, the annuitant would be dismayed to discover the insurance company could refuse their contributions.
Now, according to the New York Times, insurance companies are trying to convince their customers to get out of annuity products with guaranteed returns. Customers are receiving letters warning annuitants that their benefits will be greatly reduced if they take no action. They might have options, such as moving into an insurance product with a lower benefit or accepting a lump-sum payment reflecting the annuity’s remaining cash value. Both are options that help the insurance company get out of a contract they couldn’t live up to.
None of this should come as a surprise. It was part of the insurance companies’ plans all along: offer products with benefits too good to be true over the long-term with the knowledge that the fine print allows the company to change the rules when the company no longer needs or can no longer afford to sell annuities to a frightened public.
Here is how one insurer is handling its unaffordable policies, although the New York Times still seems to think this situation was unexpected by the insurer:
The Hartford, which is getting out of the annuity business, has gone further: it has sent letters to clients and advisers saying that they have until October to change the asset allocation in certain variable annuities. The goal is to lower the client’s balance and therefore the amount the company will have to pay out. If they do not do this, they will lose the rider that guaranteed a payment regardless of the cash value of the annuity. Instead of getting a 5 percent guaranteed payout for life, the owner would get a lower payout based on a lower account value.
This is representative of a larger reality in life. Very few contracts you sign are ever equitable. One party almost always has more power than the other. In this case, the insurance companies can make changes to the deal, and the annuitants have no choice but to accept the changes. In fact, many annuity plans prevent customers from cashing out their plans without hefty fees, even if the insurance company forces these changes on the customers.
Guaranteed income can be an important strategy for financial planning. Unfortunately, with annuities, the word “guaranteed” does not always mean what people think outside of the financial industry.
Did you buy an annuity before or at the beginning of the recession? Are you facing any restrictions on contributions or changes to the plan? Would you consider purchasing an annuity with a guaranteed return?
Published or updated July 15, 2013.