Understanding Withdrawal Guarantees

Withdrawal guarantees are a guaranteed way to plan for retirement income.  They can be paired with features such as lifetime income riders and are often features of variable annuity contracts.  For retirees wanting added security to their retirement income, guaranteed minimum income benefits (GMIB) and lifetime income riders provide peace of mind that retirement will not outlast income.

Different Types of Guaranteed Minimum Income Benefits

In the last decade, protection for the principal amount of a variable annuity while an insurer is living against investment risk has gained popularity.  GMIBs are riders added on to an annuity in order to guarantee a certain amount of income in exchange for an optional charge.  These charges are normally asset based, meaning that they are based on a percentage of the value of the account.

A GMIB provides an investor with a baseline income amount on retirement regardless of how the stock market shifts up or down.  This guaranteed income can be crafted to provide income for life, income for life plus a certain period of time, and income for life plus income for a spouse.  These payments typically pay at around 5% of the amount invested.  Age-limits and holding periods (a period of time before payments begin) may apply.

There are several different types of GMIBs available:

  • Guaranteed Minimum Accumulation Benefit
  • Guaranteed Minimum Withdrawal Benefit
  • Guaranteed Lifetime Withdrawal Benefit
  • Standalone Lifetime Benefit
  • Long-Term Care Protection

Guaranteed Minimum Accumulation Benefit (GMAB)

This particular type of rider guarantees that the value of the investment will equal a particular percentage after a set number of years no matter how the stock market performs.  Typically, one hundred percent of the investment is guaranteed for ten years, but the percentage, years, and terms can vary.  Some form of asset allocation is required on most GMABs.

Guaranteed Minimum Withdrawal Benefit (BMWB)

With this type of rider, a certain percentage of the invested amount is withdrawn yearly until the entire amount is taken, regardless of stock market performance.  This type of rider is appealing when there is a down market because even if the investment loses money for the insurance company, the investor still takes the yearly withdrawal until the initial amount insured is depleted.  

In addition, there are other terms to this type of rider that can bring peace of mind to an investor.  For example, if there is an excess amount of money at the end of the withdrawal period due to well-performing investments, the account owner can benefit.  If the contract is terminated by the account holder before the end of the withdrawal period, the contract’s cash surrender value is given back.  Recently, insurance companies have introduced a step-up feature that periodically locks in a higher withdrawal amount when investments perform well.

Guaranteed Lifetime Withdrawal Benefit (GLWB)

For retirees interested in a guaranteed income for life, a GLWB guarantees a lifetime of withdrawals for a set percentage based on age at the time withdrawals begin.  This amount will continue to be paid to the insured as long as they live, even if they exceed the original amount of the annuity.  Spousal continuation benefits which guarantee withdrawals for the surviving spouse are also available with GLWBs.

Standalone Lifetime Benefit (SALB)

Introduced less than 10 years ago, the SALB is similar to the GLWB but adds the flexibility with the different types of assets that are protected.  This innovative new annuity product is steadily gaining popularity.

Long-Term Care Protection (LTC)

With concerns pertaining to long-term care, if needed, annuity contracts also offer LTC features.  Under these terms, contracts allow for an annuity owner to withdraw money from their contract without having to surrender, or terminate, the annuity.  Charges pertaining to this type of withdrawal may be waived if the owner has been confined to a nursing home or suffered a critical illness.  Eldercare, consultations, and discounted LTC services are also available.  

Lifetime Income Benefit Provision (LIB)

A lifetime income benefit rider allows for a retiree to obtain a guaranteed income payment, whether it is monthly, quarterly, or yearly, for a lifetime, even if the balance of the account drops to zero.  LIBs are best matched with investors who plan on living more than 20 or 30 years past retirement.  

For example, if a retiree invested $100,000 in a variable annuity with a 5% LIB rider, they would receive $5,000 of income every year until death.  If this particular retiree draws this yearly amount for more than 20 years, they will still continue to receive the $5,000 every year even though they will have then withdrawn more than their original $100,000 investment.

Annuities and Income Riders

Since there are many different companies that offer income riders with an annuity, the terms of these different companies can vary greatly.  When looking for a guaranteed withdrawal benefit rider or a lifetime income rider, an investor should be sure to:

  • Understand the terms of the rider since a lifetime income rider is different from a guaranteed minimum withdrawal benefit.
  • Fees can vary greatly from company to company, so be sure to check the total fees paid on an annual basis, including advisor fees which should be less than 3% yearly.
  • Find a guaranteed minimum withdrawal rider or lifetime income rider that allows access to the remaining principal.  This means that even upon death, any remaining funds can be passed on to heirs.
  • Annual step ups can lock in higher withdrawal benefits based on how the investments performed previously.  If the value is less than the previous period, the income rate will not decrease.
  • An insurance company that is reputable and has quality ratings are safer due to their longevity.  An additional safety factor for some is to choose several quality insurance companies to invest in for diversity purposes.

With the complexity of withdrawal guarantees, it is best to seek advice from a highly-qualified expert that can explain the different types of guaranteed minimum income benefits and lifetime income benefits.  In addition, each retiree has different goals and should base their decisions on their individual needs.

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