Today, insurance companies are trying to buy their way out of promises on variable annuities. The guarantees have become too costly. Variable annuities with guaranteed lifetime income were aggressively marketed by insurers for years. A lot of salesmen became millionaires on the fees they collected, and insurers were able to mint their own money. In many cases, the fees exceeded 3.5% of assets per year, and most had surrender fees for early withdrawal, which could lop off 7% of your assets on the way out the door.
But now insurers are offering to buy back these variable annuities with lifetime income guarantees at a deep discount. Lifetime guarantees were easy to make when the stock market was generating much higher long-term returns. Today, these insurance companies are looking at lousy returns and fear they won’t get bailed out by a surge in the markets. Hartford Financial Services Group, which was bailed out by the government, and the Transamerica unit of AEGON N.V. are asking customers to trade in their guarantees. According to a Transamerica customer, she was offered 80% of the guaranteed-base value of her annuity. If she sells now, she’s guaranteed to get less than the current base value of the contract.
Why would anyone get involved in such an arrangement, where you’re treated like dirt? It’s simply another example of the insurance companies looking out for their bottom line and not for that of their customers. You want to invest your hard-earned money with a financial fiduciary whose interests are aligned with yours, not an insurance company whose promises are pie in the sky.