A variable annuity is a life insurance contract, a wager on the life expectancy of a person. In return for an investment of an initial lump sum or series of premium payments, the investor begins receiving an income stream at a certain milestone, for instance as the annuitant reaches retirement age. That income stream keeps coming for as long as that annuitant lives. Various configurations, add-on features, and other options can make the advertised returns attractively high, which is the core of the sales pitch.
Potential pitfalls include the sheer complexity of the contract with optional benefit riders, the length of time that the principal may be tied up, fees and other charges that undermine the ultimate payoff, multiple decision-points during the term of the contract, tax benefits that turn out to be redundant, the issuers’ built-in contractual permission to adjust the terms of the deal, and the unattractive returns of the annuity compared to more liquid conventional investments. Many variable annuities have been aggressively sold, because they pay high commissions back to the brokers.
The Accumulator series is AXA’s “flagship” variable annuity, and AXS is among the top five issuers of VAs in the United States. Its history illustrates some of the complex, detailed ins and outs of VA contractual terms and conditions. A Wall Street Journal article of July 2009 details the story of an AXA investor who had been given a “no-lapse-guarantee” feature, a promise that if their fund balance dropped to zero during the waiting period, the investor could receive their guaranteed minimum income payments, although at some discount. The investor discovered that this “no-lapse-guarantee” feature could be voided under certain conditions not detailed in the original contract language. Further, to quote from an AXA October 2011 press release, “One of Accumulator’s most compelling features is the optional Guaranteed Minimum Income Benefit (GMIB). The optional GMIB rider, pioneered in the industry by AXA Equitable and available for an additional fee, provides a ‘floor’ of future, predictable lifetime income, regardless of investment performance.” Even experienced professionals find it difficult to
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