If you own a variable annuity that has any type of guarantee on it, you might be receiving a letter with a surprising offer in the mail. This letter may inform you that the insurance company is prepared to pay you a chunk of money if you will only release them from certain guarantees that your variable annuity might have. These guarantees are perhaps why you invested your money with them in the first place.
For example, your guarantee might be that you will earn some specific minimum rate of return, say 5 percent or 6 percent per year. (To get that guarantee, you must take periodic income payments; you cannot cash out the account and get a lump sum) Since the stock market may have performed under your expectations, companies have decided that they would rather pay you to relieve them of those guarantees instead of continuing on with them.
What I find interesting is that without those guarantees, you may not have put your money there at all. Some people might ask; why would I pay a company 3 percent or 4 percent per year in various fees to manage my money unless they had some underlying guarantee that made it worthwhile?
So now, we have some companies saying they don’t want to do this anymore and that they are willing to pay you money to “change the deal.”
If you get one of these letters, what should you do? Should you take the “offer,” or should you just continue on with the contract?
Your decision should be based on your specific circumstances, and you should definitely talk to a financial professional that you trust, perhaps more than one.
With that being said, you need to keep something in mind if you have one of these policies; a number of these contracts have two types of fees:
1) the “current” fee structure that you are paying now; and
2) the “guaranteed” fee structure that the insurance company can charge if they want to, which is often substantially higher than your current fees.
Now imagine you are the insurance company and you want to get your policyholders out of this plan. You offer a payment to get them out; some take it, and some do not. You have the option to increase your fee schedule on the ones who stay. What would you do to help encourage the rest of the folks to move their money somewhere else?
If you think about that question a little, I’ll bet you come up with the same answer as I do.
The good news is that if you find yourself receiving one of these letters, new programs in the fixed annuity environment have significantly different guarantees than what those variable annuity contracts offered years ago. The fixed annuity environment does not rely on the stock market, meaning that the ups and downs of the market don’t impact your principal.
When you talk to an advisor to help you determine what you should do, make sure you have that piece of information filed away in the back of your mind. If the idea of taking the payment option and moving your money to a fixed annuity with much different guarantees is not discussed, that should raise a red flag in your mind that you may want to talk to another advisor to gain a different perspective.