Many people bought variable annuities with lifetime income guarantees over the past few years to protect themselves from the volatility of the stock market. Many of these contracts offered a 5% or 6% guaranteed annual return that would be used as the basis of distributing income in the future. Now some insurance companies want to buy back these contract guarantees. Transamerica, Axa, and most recently Hartford have sent letters to policy holders offering cash bonuses paid as a lump sum and/or waiver of surrender charges, in exchange for giving up the guaranteed income stream. It would appear the hefty fees these contracts charge for the guarantees may not have been high enough.
What should you do if you receive an offer for your contract? Most buyers of contracts with these guarantees have been people seeking the security of a lifetime income stream and are comfortable with an insurance company bearing the risk. A payout of 5–6% is difficult, if not impossible, to replicate in today’s low interest rate environment without taking risk. Risk was what these people were trying to avoid when they bought the contract in the first place. In general, if you are younger (life expectancy of 15 years or more) and in good health, the bonuses being offered probably aren’t going to make up for the security the guaranteed contract provides.
Our approach would be to calculate the present value of the guaranteed payouts over life expectancy and compare it to the cash offer made by the insurer. Assuming the present value calculation is close, the final decision would then depend on the comfort level of our client and whether their need for income guarantees still exists. These offers could make sense to people with ill health, who aren’t worried about outliving their savings. It would also appeal to some people with pressing cash needs. Otherwise, risk adverse policy holders should probably hold onto their contracts.