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Tue November 13, 2012
Should you give up the guaranty on your variable annuity?
When it comes to retirement, some people turn to variable annuities for guaranteed income.
These annuities, provided by insurance companies, offer a guaranteed return, even if the stocks and bonds you're invested in go down the drain.
Thanks to the shaky economy, some companies are asking clients to give up that guaranty, in exchange for a lump sum buyout.
Should you take them up on the offer? That's the big question on this week's Money Matters with financial commentator Greg Heberlein and KPLU's Dave Meyer.
No one likes seeing a financial decision blow up.
You spend a lot of time gathering sometimes complex information to make your choices. But then the terms change. The bank imposes new fees without your consent. The stock someone said was perfect for you, wasn't.
The market crash of 2008 changed the playing field.
One example: college savings plans across the nation are charging more to pay for college down the road. At the same time, many states are adjusting their programs in a way that could mean less favorable payouts.
A similar situation affects pensions. Lower returns on the money invested is forcing some pension funds to cut payments to those already retired, and minimizing or eliminating plans for those still working.
When you buy into these things, you think they’re set in stone. But they’re not.
The latest ball of confusion surrounds variable annuities. Americans have put more than $1.6 trillion into these investment vehicles.
A variable annuity allows investors to buy and sell any number of mutual funds at any time without paying taxes until withdrawal. To keep up with other investment vehicles, the insurance companies who developed them offered a minimal guaranteed return.
When the market crashed, those guarantees began to look too generous.
To remain solvent, some annuity sellers are petitioning regulators to allow them to offer annuity owners more cash now in exchange for dropping the guaranteed return provision.
Although holders don’t have to agree to the change – at least not yet – many unsophisticated investors must study some fine print.
For some, the answer may be simple.
If an individual has plenty of money to support a long retirement, taking the extra money upfront and giving away the guarantee might make sense. If someone knows life expectancy has been shortened, taking the buyout might be a good deal.
But for most – who entered into a legal arrangement expecting an uninterrupted long-term guarantee – accepting what amounts to a buyout makes no sense at all.
Also, the Wall Street Journal reports Hartford Financial Services Group is the latest company to ask customers to accept a buyout.