Changing Variable Annuities

Investors flocked to variable annuities after the 2000 market crash. Insurers had enhanced the policies by offering guaranteed minimum rates of return, promising to make up for market losses, and other attractive terms. In the current environment, insurers are having a hard time keeping those promises. Low interest rates, lousy stock market returns, and other factors make insurers’ coffers less plentiful than they expected.

The response by insurers is to change their variable annuity policies, sometimes retroactively. That’s just what Prudential recently did, suspending the right of some existing policyholders to add to their accounts on the same terms. Insurers usually reserve the right to change policy terms somewhere in the prospectus. They don’t highlight it, of course, and few policyholders closely read the prospectus and know all the terms. So, changes in existing policies can happen, and you should anticipate more of them in the future since the Fed is keeping its zero interest rate policy until at least 2015.

This squeeze has made it harder for annuity providers to sustain the generous guarantees they offered a few years ago. For example, policies that might have offered a 7 percent growth rate would now offer as little as 5 percent, said Robert Luna, CEO of SureVest Capital Management in Phoenix, Arizona. Guaranteed payout rates that might have been as high as 7 percent have shrunk to 4.5 percent or lower.

The affected Prudential Annuity contracts guaranteed a certain growth rate—in some cases, up to 7 percent—in the policyholders’ benefits accounts. Suspending new contributions to that account limits the amount of new money that can grow there.

“The decision to suspend acceptance of additional purchase payments was made as a direct result of the persistent low interest rate environment that has impacted our industry,” a Prudential spokeswoman said in an e-mailed statement.