Last month, we explored the recent trend of variable annuity (VA) insurers deciding that they no longer want to be obligated to the “shadow” value guarantees that are offered through their products’ guaranteed living benefit (GLB) and/or guaranteed death benefit (GDB) riders. While these riders were initially developed to equalize the sales of VAs (particularly during times of market volatility), they have now become a burden to the companies that underwrite them. Today three insurers have essentially proposed a cash buyout should their policyholders voluntarily surrender their GLB and/or GDB riders.
Before we commence our exploration of the potential problems this presents, we should discuss early VA rider product development. When these riders emerged in 1996, regulators were quick to step in, and establish replacement guidelines to avoid the potential for annuity purchasers giving up a perfectly good in-force annuity for a newer one that may be…well, not as good as their in-force annuity. But why on earth wouldn’t these clients want to exchange their in-force annuities for something that is “new and improved?”