It isn't often a business says, "Thanks, but no thanks," when you try to invest more money with it.
But that is what a growing number of life insurers are saying to people who, years back, bought the retirement-income product known as a variable annuity, a tax-advantaged way to invest in stock and bond funds. Many were sold with guarantees of steady income for the buyer's lifetime, even if the fund accounts become depleted-and these generous promises are the focus of insurers' moves.
At least five big insurers have advised annuity owners over the past 16 months they won't accept, or are restricting, additional money destined for older contracts with the richest guarantees. They're acting under fairly standard provisions of insurance contracts that give insurers such leeway, but which rarely, if ever, have been exercised in the past, financial advisers say.
It is the latest in a series of measures by the insurers "to rein in risk" in the wake of costly lessons learned in the 2008-09 financial crisis, says Kevin Loffredi, an analyst at Morningstar Inc.
Variable annuities are often maligned for their steep fees-typically 3.5% or more of the invested amount per year. But the global markets meltdown dramatized the value of the guarantees to their owners-and the danger to insurers. While most insurers run hedging programs to mitigate the risks, the steep slide in stock markets exposed shortcomings at some companies. Many had to bolster reserves and raise more capital; two took government bailout money, since repaid.
Immediately after the crisis, insurers yanked generous versions from the marketplace and launched new ones with scaled-back benefits, higher prices and less choice in the funds' menu.
Now, insurers are grappling with the prospect that ultralow interest rates-which raise their hedging costs-will be around for several more years. The Federal Reserve is seeking to keep rates low to bring down unemployment.
Among insurers that have blocked or limited contributions to older contracts are Allianz SE's Allianz Life Insurance of North America, AXA SA's AXA Equitable Life Insurance, Manulife Financial Corp.'s John Hancock, MetLife Inc. and Prudential Financial Inc.
Some longtime annuity owners aren't happy with the moves. "Angry would be one way to describe it," says Alma Stanford, a 70-year-old widow in Seattle who bought a variable annuity with an income guarantee in the 1990s. "It cuts off options for us to plan for the future. You thought you had Plan A, and you have to create a Plan B and C."
AXA says it gave two months' notice of its cutoff to its financial planners and mailed letters directly to clients six weeks before the effective date; some other companies say they gave at least a month's notice. "Allianz Life stopped accepting new premium to certain variable annuities due to significant changes in the financial markets," a spokeswoman says. MetLife's goal is striking "a balance between growth, profitability and risk so that we can continue to fulfill our promises," a spokeswoman says. A Hancock spokeswoman says the Boston insurer's limitations were "based on industry factors and market conditions."
Typical of the contract language is the following, from Prudential, which declined to comment further: "We reserve the right to not accept additional Purchase Payments if we are not then offering the benefit" in the market.
Last fall, Securities and Exchange Commission officials contacted some of the biggest insurers to review contract language, several insurers confirm.
In a November speech, Norm Champ, director of the SEC's Division of Investment Management, said that "regardless of whether any or all of the companies had effectively reserved the right to suspend payments, one has to question the message this course of action sends to investors in these products generally." He added: "The message might read something like this: 'Here is the deal we are offering you, unless we find out later that we miscalculated.' "
The SEC isn't currently pursuing any regulatory action in the area, a person familiar with the matter says.
Watch for Mailings
Insurance-company representatives and financial advisers say consumers should look closely at any mailings to them from the insurers that issued their variable annuities and consult a financial adviser, if needed, to decide whether it makes sense to add more money before any cutoff takes effect.
Annuity owners also should look at the rules related to payment of any death benefits to beneficiaries, because in some contracts the benefit terminates if the fund balance is depleted and the income guarantee is triggered. An owner may need to add money to avoid losing the death benefit, though David Moskovitz, an adviser with RBC Wealth Management, says figuring out the amount is problematic. Even two months' notice "doesn't help much [when] we're trying to predict 15 to 25 years out on what the performance will be to make sure enough money is left in the contract," he says.
Mark Cortazzo, senior partner with financial-advisory firm Macro Consulting Group, says the money shut-offs are "frustrating." But he adds: "I think that's healthy, because the insurers can't have this unlimited liability."