Investors who purchased variable rate annuities with guaranteed minimum returns may be surprised to learn that the guarantee is not necessarily guaranteed. Under some contracts, it is possible for the insurer who wrote the annuity to cancel the guarantee or significantly reduce its payout.
Contracts that were sold between the late 1990’s and as late as 2006 may contain a provision indicating that the insurer has the right to terminate the guarantee if the underlying investment accounts don’t have enough money at any point during the waiting period, typically about ten years, to cover the annuity’s yearly fees.
Newer annuity contracts usually have provisions that protect investors from the loophole described above. The new contracts, however, also have their own “guarantee” issues. Although the newer contracts usually have a “no-lapse guarantee feature,” meaning customers balances that go to zero during the waiting period are allowed to immediately start their guaranteed minimum income payments, although at a lower rate than if they had waited.
The “no lapse guarantee” can be cancelled, however, if the holder makes an “excess withdrawal.” An “excess withdrawal” is usually deemed a withdrawal in any year that would exceed the stated percentage withdrawal amount. For instance, if the contract calls for a 10% a year withdrawal and there was a $100,000 base, taking out in excess of $10,000 in any year would be considered an “excess withdrawal.”
It goes without question that many investors have unwittingly run afoul of these provisions and are not happy about the results. Many investors are indicating that they do not feel that the risks associated with the provisions and the loss of their guarantees was disclosed to them when they purchased the annuities. With the large number of guarantee provisions set to kick in with the recent market downturn, the “guarantee” issue seems unlikely to go away any time soon.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing individuals in securities and insurance product cases. For further information, please contact us.