Most people believe that when they buy a product they are buying a product that can never change. And with tangible assets you take possession of that is usually the case. However, when you are entering into a contract you are buying the product and all the terms and conditions of that product. If I am renting a home, the monthly rent is set at a certain amount for a certain length of time…unless they aren’t. If the contract on my rental, says the owner can change the terms based on certain conditions or on a whim, then that is part of the agreement.
While this is understood in renting an apartment, this is a newer circumstance with some annuities. For years, even though the terms of the contract say the insurer can change certain aspects of the product, most have not. The main reason for these changeable conditions within insurance products was for the health of the insurer. Obviously, the policyholder would rather the insurer low their rates, than become insolvent. However, the perfect storm of two major dynamics within Variable Annuities has caused certain companies to make drastic reductions in values. As citied in this article in the Wall Street Journal by Kelly Greene and Leslie Scism, AXA, Manulife’s John Hancock, Hartford, and Transamerica are raising fees, restricting additional contributions, and where that’s not enough to cover their losses, offering to buy back contracts.
What should you do if you own one of these policies? Here are some suggestions from Marketwatch’s Glenn Ruffenach:
Open your mail: The letter you received recently from your insurer – the one that appears to contain boilerplate language about your variable annuity – might actually be an alert to changes in the contract. Read any and all mail from your insurer closely, and if you don’t understand it, find a financial adviser who does.
Run the numbers: If the underlying investments in your annuity are doing particularly well and, as a result, are pushing up your “benefit base” (which will help determine your eventual payout), the fee associated with that base figure could increase. In some cases, it might be better to stick with a lower benefit base – and, in the long run, a lower fee.
Don’t trade in your annuity lightly: Some insurers are offering variable-annuity owners the opportunity to trade their guarantees for cash. A buyout might make sense for some (say, an individual with pressing cash needs). That said, you could be hard-pressed to find new annuities with the same income guarantees or fees.