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 through; Hartford, Transamerica, American Scandia, Prudential, Jackson National, John Hancock, and MetLife 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, and American Scandia 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 the offer 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, Guaranteed Minimum Income Benefit, and Guaranteed Minimum Death Benefit. 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 policyholder’s potential future benefit payouts. Insurance companies’ reserves are similar to banks having to keep money in their own reserves (FDIC insurance). The difference is, insurance companies have to keep more money in the 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 hopefully it was priced that the company would still be profitable. The actuaries had not anticipated interest rates going down.
Also, the low interest rates were incorrectly priced into the product. End result, low interest rates made by companies offering these benefits changed very abruptly. In a sustained low interest rate environment, companies would have to take 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.
Equitable is one of the largest financial companies in the world, and according to the financial rating companies, they are not in trouble financially as they are currently 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 reduce 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 most people not using their products correctly. In most cases, AXA will have charged for two benefits and the consumer only using one benefit. Since AXA Equitable is doing well financially, they feel they have honed-in on a formula acceptable offer for 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 – it depends on your specific financial situation and your retirement goals. Thus it 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. It takes personal considerations, as peoples’ lives change, their need and use for these products/money can also change. 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.
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