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September 04, 2005 at 04:00 PM
“Well, if that doesn’t beat all,” was the first thing that came to mind when I saw an August 2, 2007 Los Angeles Times report about how some hedge funds are temporarily barring withdrawals.
Apparently the funds are suffering losses so they are taking this step to ward off having to sell securities when prices are plunging, as has occurred in recent weeks.
The writer, Tom Peruno, says the practice is legal. But, can you imagine how the investors feel?
If you are in insurance, you already know the answer. Before the era of modern insurance contracts, insurance professionals encountered strong consumer resistance to immediate annuities that consumers believed would lock up their money forever. They also faced consumer resistance to putting money into long term care and term life insurance policies that may never “give back” during the consumer’s lifetime.
Pure and simple, people don’t like jailing their own hard-earned money. They want to be able to take it out. For many, the mantra is: “No access, no deal.”
The recent episode with the hedge funds should give insurance professionals some leverage, however.
That’s because many modern insurance and annuity contracts not only offer liquidity features; they guarantee the features.
This liquidity is now available in several different forms. Examples include the guaranteed minimum withdrawal benefit and guaranteed lifetime withdrawal benefit in variable annuities; the accelerated benefits features now common to many life policies, triggered by long term care and/or terminal illness; the commutation features in newer lifetime income policies; and the bailout provisions in some fixed annuities. (Even “return of premium” features can be thought of as a type of liquidity in that money paid in is not gone forever; you can get it back under prescribed circumstances.)
These are in addition to the 10% penalty-free withdrawal provisions found in most traditional annuities; the systematic withdrawals in fixed and variable annuities; the policy loan features in most cash value life policies; and the right to surrender annuity, life and LTC contracts in return for a value as determined by the contract.
Of course, fees, interest or penalties may be applied for taking money out before the end of a stated period. This is no different than bank penalties for taking money out early from certificates of deposit. But consumers who are willing to pay the fees at least know they can get to the money.
