Jeremy Reif, CRPS | December 28th, 2015 |AXA Equitable Annuity, Variable Annuities, Guaranteed Minimum Income Benefit (GMIB), Guaranteed Minimum Death Benefit (GMDB), Earnings Enhancement Benefit (EEB) also known as Protection Plus, Annuity buyout, Accumulator, Accumulator Plus, Accumulator Select.
AXA Equitable was one of the pioneers of the Guaranteed Minimum Benefits (death or income) or Earning Enhancement benefits. During their heyday the “Accumulator” was one of the top products available to consumers. Similar products were offered; Hartford, Transamerica, American Scandia, Prudential, Jackson National, John Hancock, Met Life to name a few. Of the companies listed, all have changed their current offerings for a wide variety of reasons.
John Hancock left this annuity space, Hartford offered a buyout of their own and sold their company to Prudential, American Scandia was merged with Prudential. Other companies have offered buyouts or merged with another. Knowing that offers have been made; how does AXA’s current offer stack up to their competitors and should they be accepted or not?
First we must understand why any of these companies would offer a “buyout” option? When these products were designed, the respective companies had actuaries run many different calculations to establish the internal cost; Mortality and Expense, Administration, Distribution, Investment. They would then add additional rider charges based on what the consumer added to their contract. Part of actuaries’ original calculation was the assumption of an interest rate.
Why are interest rates important? During the product’s peak, the interest rates or even the average interest rates were much higher than today’s current rates. Insurance companies have to keep “X” amount of money in reserves to make good on their policy holder’s potential future benefit payouts. Insurance companies’ reserves are similar to banks having to keep money in their own reserves (FDIC insurance). The difference, insurance companies have to keep more money in reserves than banks.
Why does it matter that interest rates have been low for a long period of time to insurance companies? Each insurance company has their own way to invest their “reserves money”. For example, a company might take the benefit rider charges and invest a portion of this in treasury bills or something similar. They would also invest a portion in other various strategies to help keep up with inflation. The intent is that the insurance company would invest this money to keep up with the stated guarantee in the contract and hope it was priced that the company would still be profitable. As interest rates went down, this was a change that the actuaries had not anticipated. Nor would the low interest rates be priced correctly into the product. End result, low interest rates made companies offering these benefits to change very abruptly. If this was a sustained low interest rate environment (like it became), companies would have to do one or more of the following actions; take more risk on the money set aside in the reserves, charge more on new contracts for future benefits, lower their guarantees on future contracts, or offer to buy consumers out of contracts.
AXA Equitable is one of the largest financial companies in the world and not in trouble financially. They are an A+ rated company (Standard & Poor’s). AXA’s main business is overseas in property and casualty (home/auto insurance). As other companies have already done, AXA is trying to clean up their future liability for the benefits they offered consumers years ago. Whether this is paid today or years from now it is still a liability. AXA is banking on that most people will not use their products correctly. AXA will have charged in most cases for two benefits and the consumer will only use one benefit. Since AXA Equitable is doing well financially, they feel they have honed in on a formula they feel is an acceptable offer to the consumer. This allows the end user out of surrender penalties with a cash offer if the purchaser walks away from their benefits.
Should you accept AXA Equitable’s “buyout” or not? This a very personalized question and can’t be answered with a simple yes or no to everyone, rather it should be reviewed on a case by case situation with a truly independent advisor that is not bias. It takes personal considerations, as peoples’ lives change (health, retirement, etc), their need and use for these products/money can also change over the course of time. Each case is completely different; market entry times, all in costs (typically between 4%-5%), risk profiles, “buyout offers” and use or non-use of income from the products that the consumer purchased.