Axa aims to offer VA policyholders a hike in account value if they agree to cancel a generous death benefit. If the plan works, expect other insurers to follow suit. Says one industry watcher: 'The floodgates will open.'
Axa Equitable Life Insurance Co. has filed to offer certain variable annuity clients the chance to terminate their death benefit rider in exchange for a higher account value.
The insurer made its filing with the Securities and Exchange Commission on June 8.
This “Guaranteed Minimum Death Benefit and Earnings Enhancement Benefit Offer” applies to the insurer's Accumulator variable annuity. It is available to some legacy clients who, at the time of contract purchase, elected a guaranteed-minimum death benefit — as well as those who chose an Earnings Enhancement Benefit feature that provides an additional death benefit, according to the filing.
“We are making this offer because high market volatility, declines in the equity markets and the low-interest-rate environment make continuing to provide these guaranteed benefits costly to us,” the insurer wrote in its filing.
“If [a client accepts] this offer, we would gain a financial benefit because we would no longer incur the cost of maintaining expensive reserves for these guaranteed benefits,” Axa said in its filing. The client “would benefit because [he or she] would receive an increase in [the] contract's account value and [death benefit] charges would cease.”
"This is an optional, limited time offer on Accumulator contracts issued between 2002 and 2007, intended to benefit the client and the company,” said Axa spokeswoman Discretion Winter.
“Clients can terminate and stop paying for riders they may no longer need, and the company benefits because these riders are expensive in today's market,” she added.
Axa's filing indicates that the offer will be made available for a limited time, and clients will have 90 days to consider it. Those who don't respond will be deemed to have rejected the offer.
Customers who choose to terminate their GMDB and their standard death benefit will no longer pay annual charges for the death benefit rider. Instead of the standard death benefit, the amount payable to beneficiaries will be equal to the contract's account value.
To determine how much it will credit to the client's account value, Axa will use an actuarial calculation that considers the client's life expectancy, the contract's current and projected account value, and the current and projected GDMB and EEB benefit, according to the filing.
The offer amount also is based on the reserves backing the contract, so factors such as the asset allocation within the variable annuity and interest rates contribute to the calculation. Since these factors change regularly, it also means the offer will change each business day. As a result, a client's offer letter will indicate the amount Axa is willing to credit the account if the client accepts as of the date of that letter. The actual amount could be more or less than the quote, according to the filing. In general, as the contract account value rises, the amount of the offer falls.
More insurers are expected to weigh similar strategies as they contend with their legacy VA guarantees, particularly on living benefits.
“I predict the floodgates will open on this,” said Tamiko Toland, managing director for retirement income consulting at Strategic Insight. “This is useful as far as death benefits are concerned, but there's more of a benefit to doing this with living benefits because of policyholder behavior risk: How frequently and to what extent they use the living benefits.”
Axa's SEC filing is the latest in a series of offers allowing VA customers to turn in their contracts for more than account value — while allowing carriers to reduce the liability tied to guaranteed-benefit features.
Transamerica Life Insurance Co. in May rolled out its Alternative Lump Sum Offer to certain legacy VA clients. Those who take the offer lose their income rider, but get an increase in their account value. In addition, they can turn in the policy without paying surrender fees.
Further, Achaean Financial Inc. is developing a product called Income Plus+ that will allow clients and carriers to share the risk tied to variable annuities, instead of having insurers take on all of the downside exposure.
Essentially, that offering involves the use of an immediate variable annuity, plus a cash reserve. That reserve is allowed to grow during strong market years. During down years for the immediate variable annuity, the banked amount is drawn to help support payments to the client.
According to a recent presentation by Achaean, this idea could also help carriers restructure their liabilities tied to legacy VAs with living and death benefits.
