“What I’m seeing is a lot of people who have been sold variable annuities in the last three years. Interest rates have been very low,” Nygaard says, “but these annuities were sold with lifetime guarantees of a stream of income. Now my clients find that some insurance companies are walking away from their obligation to pay lifetime income.”
Nygaard says her clients have contacted her because they’ve received letters from their insurance companies either wanting people to put more cash into their annuity or requiring people to accept a higher value for the annuity, but at the same time promise that they would never annuitize their annuity (meaning they would never receive their monthly checks).
“This defeats the purpose of buying an annuity,” Nygaard says. “People purchase an annuity over a mutual fund because the insurance company promises them they can choose to start receiving a monthly check. Companies in the news lately as having taken too much market risk and potentially not being able to meet their annuitization obligations are Aviva, Transamerica, The Principal Financial Group, ING, MetLife, Prudential, and two smaller players, Guggenheim and Genworth. We think the variable annuities sold by these eight companies expose their customers to the risk that there will not be sufficient assets for people to annuitize. People are paying for a product that, given the capital situation of the companies, is at risk, and yet annuity buyers the last three years have not been told of these risks when sold the annuities.”
Of concern is that a lot of variable annuity buyers are people who are retired or approaching retirement. Nygaard says that many people she sees worked for phone or utility companies, or state and local government. When employees retire, many employers push retirees to accept a lump sum rather than a monthly payment to avoid administration expenses. Employees who take a lump sum might then put that money into a variable annuity through an IRA, which Nygaard says is also usually unsuitable.
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“The contract is only as good as the company because it is not backed by the US. It is just backed by insurance companies and they have not kept the safe, secure investment profiles that they used to have. They have averaged their assets, just as the banks and investment firms that failed, thus putting at risk their variable annuities.”
Pictured: Diane Nygaard