Advertisement
insurance

Variable Annuities With Guarantees Lose Appeal

Many insurers have altered their payout guarantees and raised their fees as a result of the market meltdown.

What do you think of variable annuities with guaranteed minimum withdrawal benefits for retirees?

Variable annuities with guaranteed payouts used to be attractive to retirees in their fifties and sixties who needed to start taking withdrawals right away but also wanted to benefit from long-term stock-market growth with some downside protection (see Savings Guarantees You Can Trust for more information). But many insurers cut back on these guarantees and increased their fees when they introduced new contracts May 1, making the these annuities much less appealing than they had been. Since December, 90% of the top 20 insurers that sell variable annuities have altered their guarantees, according to a study by Ernst & Young's Retirement Income Knowledge Bank.

Advertisement - Article continues below

Variable annuities let you invest in the stock market through mutual fund-like accounts, and there are two popular kinds of guaranteed payouts. With guaranteed minimum withdrawal benefits, you can take out up to a certain amount every year -- 5% or 6% of your initial investment had been typical -- no matter how your investments perform or how long you live. Some annuities let you boost the annual guaranteed withdrawal amount if your account value increases.

The other variation, a guaranteed minimum income benefit, also allows you to withdraw up to a certain amount each year (again, 5% to 6% had been typical). Plus, you always have the right to convert to a lifetime income stream based on the original investment amount, even if the balance in the account falls below that level. Although you give up control of your money, you may be able to increase your annual withdrawals to 8% or more. The older you are when you annuitize, the higher your payouts.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

But after the market meltdown, the ratings agencies downgraded many insurers because the guarantees the insurers were offering were too generous, potentially sticking them with big payouts to annuity holders whose accounts lost a lot of money. As a result, many insurers pulled back on these guarantees and raised their fees on May 1.

For example, several insurers reduced their guarantees from 6% of the initial investment to 5% for annuities sold after May 1. They also minimized their risk by limiting the types of funds in which you can invest, eliminating some of the riskiest funds from the lineup of choices. Some now require annuity holders to keep at least 20% of their money in a fixed account. And many have raised their fees. In the past, fees for these guarantees typically ranged from 0.6% to 1.0% of your initial investment -- on top of a standard annuity fee of about 1.4% per year, plus the underlying mutual fund fees. Now, some insurers charge as much as 1.25% just for the guarantee. About a dozen insurers either stopped offering guarantees or dropped complete lines of products, says Mark Cortazzo, a certified financial planner in Parsippany, N.J.

Advertisement - Article continues below

Cortazzo used to recommend annuities with guarantees frequently to clients in the early years of retirement who needed to start receiving retirement income and wanted to keep some money invested in the stock market, but with a minimum guarantee. He's recommending this type of annuity much less after the recent changes. "It isn't nearly as attractive as it once was," he says.

If you already have one of these annuities, though, it's a good idea to hold on tight. Insurers can rarely make changes to the guarantees once the annuities have been issued, and if you cash out you could be hit with a surrender charge and tax bill. You could also get a lot less money than you expected. Say, for example, you originally invested $300,000 and are receiving guaranteed withdrawal benefits of 6% of the $300,000 every year. If your account value fell to $200,000, that's all you'd get if you cashed out. See When To Bail On Your Insurer for more information about the downsides of switching.

Advertisement
Advertisement

Most Popular

7 Surprisingly Valuable Assets for a Happy Retirement
happy retirement

7 Surprisingly Valuable Assets for a Happy Retirement

If you want a long and fulfilling retirement, you need more than money. Here are the most valuable retirement assets to have (besides money), and how …
August 3, 2020
Retired? Good Luck Getting a Mortgage, Even If You’re Wealthy
mortgages

Retired? Good Luck Getting a Mortgage, Even If You’re Wealthy

One 70-year-old’s story highlights the challenges. Prepare for more paperwork and hoops to jump through than you could imagine.
August 2, 2020
Turning 60 in 2020? Expect Lower Social Security Benefits
Coronavirus and Your Money

Turning 60 in 2020? Expect Lower Social Security Benefits

When you file for Social Security, the amount you receive may be lower.
July 30, 2020

Recommended

Shrink Your RMDs in 2021 and Beyond
annuities

Shrink Your RMDs in 2021 and Beyond

QLACs are a special type of annuity that lets you cut RMDs from your IRAs next year and beyond, reduce the taxes you pay and guarantee more lifetime …
August 6, 2020
Time for an Insurance Review
Coronavirus and Your Money

Time for an Insurance Review

You may need to update your policies in light of COVID-19.
July 30, 2020
Insurance Question: Say Rioters Destroy My Business, Am I Covered?
insurance

Insurance Question: Say Rioters Destroy My Business, Am I Covered?

If you ask your broker, the answer may be no. But don’t just accept that response. Know what your policy covers, and how to protect yourself.
July 29, 2020
With Interest Rates Near Zero, Annuities Help Pick Up the Slack
annuities

With Interest Rates Near Zero, Annuities Help Pick Up the Slack

What do retirees do with their money when interest rates are next to nothing? Here’s how pulling annuities into the mix can help.
July 23, 2020