Have an Annuity with Lifetime Guarantees? Don't Give it Up

If you own a variable annuity -- a favorite investment recommendation of financial advisers -- should you drop it and buy one with "new features" that didn't exist before? Usually not. Yet that's what The Hartford Financial Services group recently suggested to its customers, in a letter than enraged its agents.

As it turns out, the "new features" Hartford is touting wipe out some high-value lifetime income guarantees that investors held before. What's more, the letter -- which bypassed the advisors -- didn't disclose the downside of making the switch. In angry interviews with the publication Investment News, advisors have been demanding investigations and swearing to stop selling Hartford annuities entirely.

The story behind the story is the annuity replacement business. Once you've bought one of these products, your advisor might come to you a few years later and suggest a tax-free exchange to something else. That puts a new commission in his or her product and might raise your costs.

Annuity expert Timothy Pfeifer of Pfeifer Advisory Services in Libertyville, IL, says that replacements and tax-free exchanges probably account for about 70 percent of the variable annuity (VA) business. Instead of making a lot of new sales, advisors are merely replacing the business they sold before.

Sometimes it makes sense to exchange an older VA for a new one. For example, say that you bought an annuity years ago, principally for tax-deferred growth. You've held it long enough to be able to take out the money without being charged a penalty for early withdrawals. You were planning on using that money after you retired. If you wanted an income for life, however, you'd have to use the lump sum to buy an immediate-payout annuity. Many savers don't like to do that. If you die after just a few years, the insurance company could get any money left in your account.

In this situation, a better option might be to exchange your old annuity for a new one with "living benefits." You can set up a lifetime guaranteed income with the possibility of future growth and something left over for heirs. The fees are high. What you're doing is buying peace of mind.

But switches usually make no sense for people who already own VA's with lifetime income guarantees. "That's especially true if you bought the first product before the stock market plunge," Pfeifer says.

The Hartford deal is definitely problematic. The company is touting a product it calls the Personal Retirement Manager. You're offered two buckets for your money. An investment bucket rises and falls with the market, and carries no guarantees. An income bucket provides a fixed income for life. When you switch from the investment to the income bucket, you're setting up a fixed income for life. The size of our payout will depend on the level of interest rates when you make the move.

What's enraging Hartford agents and planners is that the company's existing annuities with living benefits are a much better product. They have minimum guarantees on investment gains and generous lifetime benefits. VA investment values are down because of the 2008 market crash. But investors are still entitled to their original monthly payments for life. They'd lose those values if they switched.

Hartford spokesperson Tim Benedict says that says that advisors got letters, too, although many clients received them first. Also, no exchange can go through unless an advisor approves. If you own this annuity, and have been working with your advisor for many years, he or she would almost certainly tell you not to switch.

But the answer might be different from a new advisor who scents a commission. "When clients get a letter from the insurance company suggesting that this is a good thing to do, and the advisor says no, the client might question the advisor," says Kevin Lofreddi, senior vice president of Advances Sales Corporation, which tracks the industry.

The Hartford suffered big losses on its annuity business when the market crashed. It's not surprising that it would like to get some of this older, potentially unprofitable business off its books. But It's unethical even to imply that investors should give up good annuities for inferior ones.That's the replacement biz. It's always buyer beware.

More on MoneyWatch:
Set up a Future Retirement Income with New-Style Annuities
What Happens When Your Term Life Insurance Runs Out? 3 Tips
Should You Trust Your Broker? No, and Here's Why