Annuity Promises that Aren’t

Insurance companies have pushed hard to sell variable annuities with guaranteed lifetime income riders. These products were attractive to baby boomers who were attempting to build their own “pension.” Sadly, many of these same insurance companies are trying to undo and undercut the vary products that they sold. A recent case in point: Prudential.

Of course, if a variable annuity contract contains a rock-solid, legally enforceable promise, the seller cannot undo that promise short of bankruptcy. However, we all know how complicated these variable annuity products are. The contracts are filled with terms and conditions that only a very patient lawyer would read and thoroughly understand. In many cases, I doubt that the sales people really understand all of the limitations of the products they are selling to even less sophisticated pre-retirees.

With that in mind, let’s look at what Prudential has done.

Prudential Annuities has announced that effective immediately, it has suspended the ability of variable annuity buyers who own policies with 14 different  types of benefits to make additional contributions.

This is a serious problem for many of these annuity owners.

Because the amount of the lifetime guaranteed annuity payment is based on how much money is in the annuity account, any policyholder who intended to periodically add money to their accounts now can’t.  This means that their eventual annuity income payments may be far lower than they had planned.

The result: Retirement plan failure.

This will not be a problem only for owners of Prudential annuities. You can be sure that every insurer with a significant portfolio of annuities with guaranteed payouts is looking for legal ways to restrict those payouts.

What should you do if you own a variable annuity or are considering buying one?

Make sure that if your income plan depends on making more contributions to the annuity, you will have an unrestricted right to make those contributions. If that right is not there or can be suspended like Prudential did, you may want to move on to retirement plan B.

If you already own a variable annuity product, consider making more contributions now, before the insurer cuts off your right to make them.

Here is a link to an article that discusses this issue in more detail:  Limits on Annuity Contributions Annoy Investors

Here is another article talking about the negative reactions of financial planners to what Prudential has done.


  1. says

    This is an interesting article MJP. I have to say that purchasing annuities can really be a minefield. So many are disappointed with what they are offered and assume everyone offers the same. It really is wise to shop around and get some advice.

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