The question was: Why do variable annuity companies limit the amounts that policyowners can reallocate funds to and from the guaranteed fixed interest account in their VAs? Several of my VA customers have bumped into those limits when they try to do reallocations and they want to know why they can’t move more.

The answer is: Often, there is a limit on how much may be reallocated from the guaranteed interest account at any one time or during a year. For example, the limit may be 10% in any one year.

There also may be a limit, such as 10%, on the amount that can be reallocated to the guaranteed interest account. In fact, some annuity contracts do not allow any reallocation to guaranteed interest accounts; only new premiums may be added.

The reason for these limitations is that the issuing company has made investments, usually in corporate and government bonds and similar instruments, with maturity dates of several years or longer into the future, in order to be able to pay the promised rate of interest on the funds in the guaranteed interest account. Shorter maturities would have rates too low to earn enough to pay the promised rate.

The issuing company has had to factor in the knowledge that, for example, as interest is paid on the bonds it is buying for the guaranteed interest account, the interest earned will need to be invested at going rates, rather than at the rates the bonds are earning. It cannot afford to also sell the bonds ahead of maturity at a probably discount. Therefore, most of the funds must remain in the guaranteed interest account….

Contract provisions limiting the amount that may be put in the guaranteed interest account serve to minimize the adverse effect of having a minimum interest rate guarantee that is out of line with current rates in the market. There is no other standard (non-optional) performance guarantee in the variable annuity contract and none whatsoever with many other types of investments.

When the volatility of markets affecting the variable accounts makes variable annuity owners uncomfortable enough to want to “pull in their horns,” the guarantee interest account is available to the extent that transfers into it are permitted. When the guaranteed interest account is not otherwise available as might be desired, variable annuity owners can turn to the money market subaccount as a place to “rest” their funds for a while.

Source: This is an excerpt from page 136-137 of The Variable Annuity Handbook, 2nd Edition, by Gary H. Snouffer, J.D., CLU. The book is published by The National Underwriter Company, Cincinnati, Ohio, which is also publishes National Underwriter Life & Health and its e-newsletters, including Annuity Sales Buzz. Learn more about this book