By Sheryl Moore
As published in InsuranceNewsNet Magazine, November 2011
It has only been five years since guaranteed lifetime withdrawal benefits (GLWBs) debuted in the indexed annuity (IA) market. But since June of 2006 we have seen carrier after carrier delve into this powerful market. Why are people flocking to have guaranteed lifetime income, without the “handcuffs” of annuitization?
For one, agents are largely selling the “income story” now that caps and participation rates are at all-time lows. And for two, the extras—all of the “whipped cream and cherries” on top of the GLWBs—are making them competitive right now.
With 21 of the 42 IA carriers offering these benefits, it is time for a refresher course:
• Guaranteed Lifetime Withdrawal Benefit (GLWB) – A rider, endorsement or additional feature embedded in, or accompanying, an IA that guarantees annual withdrawals at a specified level (based on the annuitant’s age), regardless of the contract’s account value falls to zero.
• Guaranteed Withdrawal Payments – The lifetime income payments that the annuitant receives under the GLWB of their annuity.
• Benefit Base – The annuity’s value, which the GLWB payments are based upon. This is a separate value from the account value and it is only available by taking guaranteed withdrawal payments.
• Accumulation Benefit (a.k.a. Rollup) – A common feature on GLWBs that guarantees the benefit base will grow by a specified percentage (4 percent to 14 percent), as long as the annuity contract is held in deferral and lifetime income payments are not taken. This percentage is not a bonus or a guaranteed annual return on the base contract. It can only be realized if the annuitant holds the policy in deferral and is usually limited to a specified number of years (typically 10 years).
• Accumulation Benefit Deferral Period (a.k.a. Rollup Period) – The maximum number of years that the Accumulation Benefit will be credited to the Benefit Base under the contract (10 – 20 years).
• Accumulation Benefit Reset – A provision on many GLWBs with limited deferral periods that allows them to re-start the accumulation benefit deferral period so that the annuitant can continue to take advantage of any accumulation benefit for a longer period. Typically these resets can only occur over a specified duration, such as once every five years in the contract.
• Annual Step-Up – Another common feature on GLWBs that raises the benefit base to the greater of the benefit base or the account value each year. This can be especially advantageous in the event of generous indexed gains on the annuity. Many step-ups occur automatically and some occur less frequently than on an annual basis.
• Benefit Base Bonus – A feature available through only three IA carriers that credits a premium bonus directly to the benefit base of the GLWB (ranging from 5 percent to 15 percent today). This bonus cannot be accessed in the event of cash surrender and it increases solely the value upon which guaranteed withdrawal payments are calculated.
• Spousal Continuation – A standard feature on GLWBs that allows the spouse of the annuitant to continue the guaranteed withdrawal payments under their own name once the annuitant has passed away.
The single most important principal when dealing with IA GLWBs is that they are not comparable to variable annuity (VA) GLWBs. The GLWBs on VAs are intended to provide safety of principal on a risk product. These same benefits, when placed on an indexed product, merely allow the annuitant to take guaranteed payments for life, regardless if their annuity should run out of value. However, IAs are fixed products and inherently provide principal protection. These riders are not necessary to provide a hedge against a market downturn on index-linked products.
Also very important to understand is that every GLWB on the market has a cost. Despite the fact that an insurance carrier or marketing organization may tout their benefit as “no cost,” it has been priced into the product in some manner. Many of these benefits permanently reduce the caps, participation rates/fixed rates and increase the spreads in the event that a GLWB is elected on the contract.
People need to ask themselves about the impact of such a charge. What if the carrier decides to reduce renewal rates on the contract? The consumer’s gains will be reduced even further by a reduction to cover the GLWB. If this is the right type of GLWB for your client, make certain that you do not indicate that it is “free” because it isn’t. They will definitely be paying for it through lower gains on the contract.
The most common way that GLWBs are paid for is through an explicit account value charge which is regularly deducted from the contract (these charges range from 0.10 percent to 1.15 percent annually today). An important question to ask when evaluating such an expense is: “Can this charge invade the principal of the contract?”
Surprisingly, the answer is a resounding “yes” for 70 percent of GLWBs available today. This means that one can no longer market the fact that the IA’s account value will not decline in the event of a down market if such a rider is attached. These charges are still deducted even if there are no gains credited to the contract. Yes, zero is our hero, but not necessarily on IAs with an explicit account value charge for their GLWB.
Each company offering a GLWB has its own name for these features and even for the benefits themselves. Because GLWBs are becoming increasingly competitive, it is in producers’ best interests to analyze the market to assure that they are offering the right benefit for the client. More importantly, sellers need to be certain that they understand the features of their favorite GLWB so that they can properly present it to their clients.
Sheryl Moore is president and CEO of AnnuitySpecs.com and LifeSpecs.com, indexed product resources in Des Moines. She has more than a decade of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at [email protected].
(Please Note: Article appears as published in InsuranceNewsNet Magazine, November 2011.)
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