Several well-known life insurance carriers are making a surprise exit from the variable annuities business, while others are drastically scaling back their exposure or evaluating their participation in 2012.
The combination of a volatile stock market and a prolonged low-interest-rate environment has made it both difficult and expensive for life insurers to hedge variable annuities with living benefits, according to a Dec. 18 article by Investment News. As a result, many insurers are opting to limit their exposure to those hedging costs by exiting, or scaling back, their VA business, the article says.
In 2011, two big VA players – Genworth Financial and Sun Life Financial – announced that they would be leaving the variable annuities market. Others like Jackson National Life Insurance Co., MetLife Inc. and Prudential Financial are making plans to eliminate living benefits and limit investment options.
In addition, John Hancock Life Insurance Co. announced in November that it planned to withdraw an array of annuity products, including variable annuities, as well as limit distribution of existing products to only a small number of broker/dealers.
A variable annuity is a contract between you and an insurance company whereby the insurer agrees to make periodic payments to you beginning either immediately or at some future date. In return, you agree to purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.
In general, variable annuities are designed to be long-term investments to meet retirement and other long-range goals. They are not suitable for meeting short-term goals because substantial taxes and insurance company charges if money is withdrawn early. Variable annuities also involve certain investment risks.
Increasingly, variable annuities have become the focus of a growing number of legal disputes and investor complaints. Earlier this year, an arbitration panel of the Financial Industry Regulatory Authority (FINRA) awarded a Texas man and the estate of his deceased wife $1.7 million, after finding that an independent contractor, Paul Davis of Raymond James Financial Services, sold life insurance and variable annuity products that were inappropriate investments given the couple’s age and risk tolerance.
According to FINRA’s ruling, Davis sold the couple’s $3.8 million portfolio (which had been heavily invested in municipal bonds) in favor of life insurance and annuity products. He then invested in one annuity after another from 2002-2006, causing the Texas couple substantial financial penalties.