A 180-Degree Turn From Life Insurance Companies

Have some insurance companies discovered they promised more than they can deliver?

whole life insurance, longest term life insurance

A guaranteed income stream for the rest of your life. Sounds appealing, doesn’t it?

It’s an offer you might have heard from stockbrokers, insurance agents or financial advisors who were advertising annuity contracts. (To put a new spin on it, some are now referring to these products as “longevity insurance.”)

But their pitches beg an important question: Will the insurance company be able to honor its promise?

The benefits offered by many annuity contracts are based on assumptions about life expectancies. The contracts might assume that you’ll live to age 80, 85 or 90. But what happens if — thanks to a healthy lifestyle and medical advances — you live to age 100, 105 or 110? Will the insurance company be able to continue paying you for all those additional decades? What happens if it can’t afford to? Such concerns are among the reasons my colleagues and I are not big fans of annuity products.

One big insurance company, whose name you’d recognize, recently informed the financial advisors who sell its products that it is “exiting … the variable annuity business” because it wants “to alleviate the capital constraints” associated with these products.

What constraints? Well, it seems that the company promised all the people who bought its variable annuities that it would provide them with guaranteed lifetime retirement income. Yep, there’s one helluva constraint! So, the company is either losing money honoring this promise or it fears that one day it will do so. The company is essentially admitting it can’t afford to honor the guarantees it made. So, not only will it stop selling these policies, but it also wants to get rid of the ones it already sold. And to do that, it is offering a “buyback.”

If you accept the offer, you’ll get your money back plus any profits (on which you’ll have to pay income taxes), and you will no longer be eligible to receive the guaranteed lifetime retirement income that the company had promised and that you had been counting on. Instead, your annuity will be terminated and any benefits it offered will be void. 

Thus, by accepting the buyback, you’ll be letting the insurance company out of the deal.

In a letter to the insurance agents, stockbrokers and financial advisors who sell the company’s products — a copy of which I obtained — the company said it would pay those agents, brokers and advisors a 2% commission for every client they persuaded to accept the buyback.

In other words, the salesman who earned a commission to get you to buy the annuity is now being offered another commission to get you to cancel it.

This constitutes a conflict of interest, or at least the appearance of one. Is accepting the buyback in your best interest? You may never know by talking to the person who sold the annuity to you, because he or she is being paid to get you to take it. (Will that person disclose that fact to you? That’s another conflict.) Also, if you don’t take the buyback, might the insurance company increase the fees you pay?

If you own an annuity and you’re being offered a buyback, talk to us before deciding. We’ll give you advice that’s in your best interest — and you won’t have to worry that some third party is secretly paying us to tell you what to do.

Originally published in Inside Personal Finance December 2015.

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