More Insurers Raise Fees on Variable Annuities
As SmartMoney has reported, this is one way that annuities are failing to live up to their big promises. The guarantees attached to the products – minimum returns of 6% per year or better, market upside, no chance of loss and a lifetime income stream – were designed to attract people in retirement or close to it.
And it worked, attracting $650 billion in assets in the last five years. But the guarantees are only as good as the insurance company’s ability to hedge them, and even when the markets were rising, some insurance company executives admitted their strategies hadn’t been tested by real-life crisis conditions. Now some estimates suggest that hedging costs have doubled in the last year, and insurers are passing those costs along to their customers.
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For example, an investor might purchase a $100,000 annuity that pays a guaranteed 6% annual return for 10 years, or market returns — whichever is better. The fees for a product like that might look something like this:
- 1.3% annually on the current balance to cover the underlying investment
- 1% annually on the current balance for the insurance wrapper (called the mortality and expense charge)
- 1% of the original purchase price to cover the guarantee
The fees now rising are all in that last category — charges that cover guarantees. At the Hartford, the fees of three different kinds of guarantees are rising, from the current charge of 0.35% to 0.75%.
In general I am not inclined to insurance investment products. They are frequently overloaded with fees. Annuities can provide some balance in retirement, so annuitizing a portion of assets at retirement may be reasonable. But I would not use insurance investment products for a significant portion of my retirement assets.
Related: Personal Finance: Long-term Care Insurance – Many Retirees Face Prospect of Outliving Savings – Investor Protection Needed – Retirement Tips from TIAA CREF
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The contracts all have fee information, including a “current fee” and a “maximum fee”. The companies cover the guarantees by using long-term hedging. In a market like this, the hedging gets substantially more expensive, and the companies have to pass a portion of the expense on to the consumer.
At the end of the day, the guarantee is still there. The customer still has a guaranteed income base that will generate retirment income for the rest of their lives. The cheapest ETF or index fund cannot provide that, nor can asset allocation. Some people have enough money where they don’t have to worry about where their next retirment paycheck will come from, and others find the guarantee — at almost any cost– more than worth the piece of mind.
No investment is suitable for everyone.