New York: Explain Effects of Excess Annuity GMWB Withdrawals
February 9, 2011 by Sheryl J. Moore
- By ALLISON BELL
Published 2/8/2011
New York state insurers must warn users of annuity guaranteed minimum withdrawal benefits GMWB) of the possible effects of excess withdrawals on future access to withdrawals.New York State Insurance Department officials talk about the need for GMWB excess withdrawal warnings in Circular Letter Number 5 (2011), which is addressed to all life insurers and fraternal benefit societies authorized to do business in New York.
A GMWB gives an annuity holder the ability to continue withdrawing guaranteed amounts regardless of the amount of value remaining in an annuity contract.
“A GMWB generally provides for a reduction in future guaranteed minimum withdrawal amounts if the contract owner withdraws money in excess of the guaranteed withdrawal amount,” officials note.
“The reduction in future amounts is typically made on a proportional basis, where the reduction equals the guaranteed withdrawal amount times the ratio of the excess withdrawal amount to the account balance (after the reduction for the withdrawal benefit, but prior to the excess withdrawal),” officials say.
Because of the nature of the reduction formula, the reduction in the guaranteed withdrawal amount may appear to an annuity holder to be disproportionate compared to the excess withdrawal amount, officials say.
“For example,” officials say, “when the guaranteed minimum withdrawal amount is $100 and the contract owner withdraws $180, the excess withdrawal amount is $80 ($180-$100). Assuming the value of the annuity contract is $500, the guaranteed minimum withdrawal amount would reduce the value of the annuity contract to $400 ($500-$100). The excess withdrawal amount further reduces the value of the annuity contract to $320 ($400-$80). The excess withdrawal results in a permanent reduction of the annual guaranteed withdrawal amount by 20% (80/400) to $80 per month.”
if the value of the annuity contract before any withdrawal was $200 instead of $500, the percentage reduction would be 80%, officials say.
The proportional reduction formulas help protect insurers against GMWB antiselection risk, and some annuity holders, such as those who are terminally ill, may have more of a need to take large withdrawals now than preserve future income, officials say.
But, to make sure annuity holders considering excess withdrawals understand the consequences, insurers need to explain the impact of excess withdrawals on the guaranteed withdrawal amount, officials say.
The New York department expects insurers to explain the rules in routine statements and also when a contract owner requests an excess withdrawal.
“A general explanation is acceptable if it also indicates that the contract owner may request a personalized, transaction-specific calculation showing the effect of the excess withdrawal as of the close of the previous business day, and what the guaranteed withdrawal amount would have been if the contract owner had taken the excess withdrawal,” officials say.
The form of the disclosure will depend on how the annuity holder asks for an excess withdrawal, officials say.
