Want guaranteed income for life? Then opt in…again.

An article in today’s issue of InvestmentNews describes how one insurer’s plan to save a retirement income benefit could ultimately result in the loss of the benefit for some customers.

The Hartford Life and Annuity Company (The Hartford) will, as of October 4, require long-time variable annuity (VA) policyholders who elected the Lifetime Income Builder guaranteed lifetime withdrawal benefit (GLWB) to reallocate their underlying fund investments according to a prescribed formula. Those who do not will forfeit future guaranteed lifetime benefits.

This is a frightening prospect for a number of reasons.

The GLWB has been a key selling point for the annuity industry since the time of its introduction in the mid-2000s. According to the LIMRA report VA GLB Election Rates (2012, 4th Quarter), the GLWB election rate was 62% in fourth quarter 2012, easily eclipsing the 18% election rate of the second-most popular guaranteed living benefit.

Additionally, a large part of the growth of the GLWB in the industry involved so-called product development wars, in which insurers continuously one-upped each other to offer the most generous benefits to investors. Insurers even one-upped themselves to retain market share. And, when the economy faltered and hedging became extremely difficult, a reduction of benefits by one company opened the floodgates for the rest to follow.

Finally, advisors must now contact affected clients, some of whom were not theirs to begin with due to the passage of time and M&A activity in the years since the policies were sold. Inevitably, some will be unable to locate.

In all fairness, insurers have little choice when managing the risk inherent in these benefits. The implementation of investment option guidelines in concert with living benefit selection has been commonplace for years—whether in the form of asset allocation models or formulas that place limits on the percentage of funds allocated to specific asset classes.

Enacting such changes years after policy issue is permissible as the standard language in the contract between the insurer and policyholder included clauses that covered the insurer for a variety of contingencies. Even so, it was believed by many in the industry at the time that it would be unlikely for these to go into effect, other than fee increases.

Yet, this is my concern—given the copycatting that goes on in the VA industry, will it be long until other insurers terminate benefits unless customers take specific actions to keep them active? Discuss below.

1 thought on “Want guaranteed income for life? Then opt in…again.

  1. Hi, Lisa! You bring up some interesting points and I agree that this is a very complicated issue. As far as copycatting is concerned, I don’t think this is going to be an issue at all. First, Hartford was the only company I am aware of who had the “we could later impose investment restrictions” clause. Everybody else either did or didn’t impose them at the time and left it at that.

    Second, the company is in aggressive run-off and so it wants to offload as much of this business as possible. Alienating potential clients is either not a concern or even desirable if it will inspire some to cash in their contracts. Many companies have slowed down sales but are still keeping a toe (or more) in the water, so they really are trying to avoid alienating future clients.

    Even other companies in run-off aren’t quite as motivated to decrease the book of business, and some of the recent transactions are helpful in that regard because the companies that buy the books make money off of managing them; losing customers means they are losing revenue opportunities. Those that are looking to shoo away the more expensive/risky clients will do so selectively through exchange offers as we’ve seen Hartford (and others) already do.

    I understand the concern and I certainly understand how this situation is very tricky for existing Hartford clients, but I don’t see this becoming part of a broader trend. It really looks like a one-off situation and hopefully everything will go smoothly for those clients that want to keep their benefits.

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