Transamerica offers legacy variable annuity clients a buyout
March 5, 2015 by Darla Mercado
Transamerica Life Insurance Co. recently unveiled a new variable annuity buyout program, offering a slice of its client base a lump sum payout in exchange for surrendering an existing VA contract.
The insurer announced the rollout of its Alternative Lump Sum Offer 1.2 in a late January filing with the Securities and Exchange Commission, that took effect on Feb. 2.
The offer affects more than 30 types of variable annuity contracts issued by the insurer, according to an analysis by Morningstar Inc. Many of those contracts aren’t available for purchase anymore, noted John McCarthy, senior product manager of wealth management products at Morningstar.
Six types of riders are eligible for the buyout offer: the Family Income Protector, Managed Annuity Program, Managed Annuity Program II and Guaranteed Minimum Income Benefit Rider (Dreyfus, WRL and Advisor).
A call to Transamerica spokesman Greg Tucker was not immediately returned.
Clients who receive the offer can opt to surrender their existing policy, trade it in for a Transamerica Freedom variable annuity as long as the existing policy isn’t subject to surrender charges or swap the policy in a 1035 exchange for an annuity product from a different carrier.
A side-by-side comparison of contracts shows that the new Transamerica Freedom variable annuity is more expensive than the Advisors Edge Select, which is eligible for the offer: Mortality-and-expense fees are 1.55% for Freedom, compared with 1.30% for Advisors Edge Select. Further, the guaranteed minimum annual rate on the fixed account is 2% on the new Freedom contract, compared with 3% on the Advisors Edge contract.
REJECTION AN OPTION
Investors can also choose to reject the offer and stay put.
Those who take Transamerica’s offer will receive a boost to their cash value equal to one of the following two amounts: 90% of the contract’s minimum annuitization value or minimum income base, minus the cash surrender value, or 10% of their net annuitization base — the annuitization base under the rider, minus the dollar amount of premiums paid after Sept. 5, 2014.
The insurer warned that a surrender of the existing policy could be a taxable event for clients: The levy would apply to the amount that the client receives that exceeds the investment originally made.
Variable annuity buyouts have been a source of annoyance for broker-dealers over the last few years as insurers try to reduce their exposure to long-dated living benefit liabilities in light of low interest rates. Legacy variable annuity contracts have not only been underpriced, they also allow investors to choose more aggressive underlying funds, and promise outsized income and withdrawal benefits.
Further, firms and reps are expected to carefully analyze buyout offers, regardless of whether a client takes the offer or decides to stay with the contract. A recommendation to stay with the contract is akin to a suggestion that a client ‘hold’ an investment and is subject to suitability.
In light of the growing frequency of these offers, firms have stepped up their suitability process.
“We have a group here that looks at every contract getting the offer, tracks acceptance rates and tracks the path of any surrenders,” said Ethan Young, an annuity research manager at Commonwealth Financial Network. “[The offers] aren’t great for the industry, but we’ve seen so many that we have a good handle on it.”
