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Cash settlements.
More recently, some companies have
proposed cash settlement offers to clients who are willing
to release the insurer from its obligations. The offers vary
in generosity, with the most lucrative extended to clients
deemed to be the biggest risks. (A young couple insured
with joint income, with a benefit base that far exceeds
their actual account balance, would be a prime example.)
In most cases, accepting the cash offer involves giving up
all insurance aspects of the contract, including any
guaranteed death benefit.
When considering the value of any cash settlement offer, it’s
important to analyze all features and benefits of the existing
policy—including the income benefit base, distribution
guarantees, and death benefit guarantees—relative to the
client’s situation. If the investor’s needs have shifted since
the purchase of the original annuity and the existing rider
no longer suits them, it may be worthwhile to accept the
additional infusion of cash. For older clients who have yet to
start distributions, the window of opportunity to best utilize
the guaranteed income rider may be closing, and it’s possible
that the buyout offer might be appealing. But, assuming
the investor’s needs are similar to when the contract was
first purchased, it’s unlikely that he or she would be able
to find a competitive guarantee in today’s market, even with
the enhanced cash surrender value. Those investors—and
most people likely fall into this category—are best served
by staying in the policy they already own.
The Marketplace Now
A far cry from the living benefits at their most aggressive,
today’s riders are designed with significantly more levers
that an insurance company can use to offset risk. Variable
on-the-fly pricing, restrictions on equity exposure, and less
aggressive rollup and distribution rates, as well as tighter
restrictions on issue ages, make these riders more palatable
for insurance companies, even during periods of extreme
volatility. Issuers of variable policies have also created
products that serve to further offset the risks of living benefit
riders. Contracts with a focus on accumulation—stripped
of all insurance guarantees, for example—help to diversify
their annuity holdings and may even allow for greater
sales capacity on products with income guarantees.
Although many carriers think they now “have it right” in
the living benefit market, they’ll continue to try, as best
they can, to reduce the risk that some of the older products
carry. With that in mind, advisors should continue to
monitor these changes to ensure that the policy is still the
client’s best option.
Ethan Young is the manager of annuity research. He is
available at x9148 or at
Wealth Management
/ Investments & Research
