The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors about some of the pros and cons of variable annuity buyout offers. This bulletin will provide information to help you consider whether a buyout is right for you.
In the years running up to the recent financial crisis, many insurance companies offered variable annuities that included generous benefits. Some of these offers promised the benefit of paying contract owners a minimum amount each year, even if the financial markets declined. Others promised minimum death benefits if a contract owner passed away. However, some insurance companies are now reconsidering those benefits because of the high cost to maintain them in the current economic environment.
As a result, if you own a variable annuity, you may have received an offer from the insurance company asking you to accept a buyout offer. A buyout offer refers to an offer by an insurance company to either: (1) increase your contract value in exchange for giving up a benefit; or (2) increase your cash surrender value in exchange for surrendering your variable annuity.
Caution: Insurance companies may make buyout offers because it is in their own best interest to do so. The insurance company does not make a buyout offer solely based on a determination that it is in your best interest.
You should accept a buyout offer only when you determine, after knowing all the facts, that it is better for you to accept the buyout offer rather than continue to own your variable annuity with a particular benefit.
1. If you accept a benefit buyout, your variable annuity’s contract value will increase, but you will lose the benefit. This can be an attractive option if you are no longer interested in that benefit.
2. If you surrender your contract, you will receive an increase to your contract’s cash surrender value, and you will no longer own your variable annuity. This can be an attractive option if you no longer want to own a variable annuity or if you want to purchase another variable annuity with different features, such as different benefits or investment options.
Be aware that the amount of the offer (the amount by which your contract value or cash surrender value may increase if the offer is accepted) may fluctuate. You should contact the insurance company or your investment professional to determine the current value of the buyout offer.
Issues to Consider
Before you accept a variable annuity buyout offer, here are a few of the questions that you should consider asking yourself to help you understand the possible effects of your decision.
1. Has your situation or that of the insurance company changed?
Consider whether your personal situation has changed since the time you made your original decision to purchase a variable annuity. For example, a decline in your health may make promises for long-term payments less important to you. Likewise, a personal financial emergency could make a large lump sum payment more desirable than a promise to provide long-term payments.
Likewise, a decline in the financial health of the insurance company may cause you concern that the insurance company might not be able to make payments to you in the future. This may make long-term promises from the insurance company less attractive.
If there has been no change in your personal situation or that of the insurance company, you should question whether accepting the buyout offer is right for you. A lump sum payout or an increase to the value of your contract may be attractive, but consider whether that outweighs the benefits provided by the variable annuity.
2. Would accepting the buyout offer have any additional financial impact?
Accepting a buyout offer may cause you to pay “surrender charges” upon surrender of your variable annuity. The amount which you may be charged decreases over a period of several years, known as the “surrender period.” For example, a 7% charge might apply if you surrender your contract within the first year after purchasing it, a 6% charge in the second year, 5% in the third year, and so on until the end of the surrender period when the surrender charge would no longer apply.
Transferring cash surrender value to a different financial product (which may be another variable annuity) may trigger a new sales charge or subject you to a new surrender charge period. Also, new financial products, including variable annuities, offered in the current economic environment may have higher fees or be less favorable than the benefits offered by the variable annuity you currently own.
Surrendering your variable annuity for a lump sum payment or using your surrender proceeds to purchase another financial instrument may also result in tax liability. You may face a 10% federal income tax penalty if you withdraw your money before you are 59½ years old. In addition, if you surrender your variable annuity and do not transfer the assets to another annuity, your surrender amount may be taxable.
3. Have you consulted with an investment professional?
An investment professional may be able to help you better understand the pros and cons of a buyout offer. However, be aware that they may receive a commission for selling you a new annuity or for persuading you to accept the buyout offer. You should ask them to disclose any conflicts of interest that they may have.
Caution: Investment professionals may be directly or indirectly compensated if an owner of a variable annuity accepts a buyout offer. Some insurance companies offer financial incentives to investment professionals if their clients accept a buyout offer. Similarly, if an investment professional is compensated based on the value of the assets managed, then acceptance of a buyout offer or reinvesting the proceeds from a surrendered variable annuity may lead to increased compensation for the investment professional.
For additional investor educational information, see the SEC’s website for individual investors, Investor.gov. For additional information related to variable annuities, also see:
• Variable Annuities: An Introduction—Provides basic facts about variable annuities and how they work.
• Variable Annuities: What You Should Know—Contains more detailed information on topics like expenses, exchanges, tax treatment, and living benefits.
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.