Understanding IA GLWB Features
April 13, 2011 by Sheryl J. Moore
It has only been a little over two years since Guaranteed Lifetime Withdrawal Benefits (GLWBs) burst into the scene in the index annuity market. Since June of 2006 we have seen carrier after carrier hop into this raging market. In fact, new product development has never been so low, but rider product development is at an all-time high. Why are people flocking to have guaranteed lifetime income, without the “handcuffs” of annuitization? Extras. All of the whipped cream and cherries on top of the GLWBs are making them ultra-competitive right now. With 23 of the 59 index annuity carriers offering these benefits, it is about time for a refresher course.
Guaranteed Lifetime Withdrawal Benefit (GLWB)- a rider, endorsement, or additional feature embedded in, or accompanying an index annuity 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 that GLWB Guaranteed Withdrawal 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 common feature on GLWBs which guarantees that the Benefit Base will grow by a specified percentage (4% – 12%), 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 (usually ten).
Accumulation Benefit Deferral 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, which 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- a common feature on GLWBs, which 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; some occur less frequently than on an annual basis.
Spousal Continuation- a standard feature on GLWBs, which allows the spouse of the annuitant to continue the Guaranteed Withdrawal Payments under their own name, once the annuitant has passed away.
Benefit Base Bonus- a feature available through only three index annuity carriers, which credits a premium bonus directly to the Benefit Base of the GLWB (range from 5% – 15% today). This bonus cannot be accessed in the event of cash surrender. The bonus solely increases the value upon which Guaranteed Withdrawal Payments are calculated.
The single most important principal when dealing with IA GLWBs is that they are not comparable to VA GLWBs. Guaranteed Lifetime Withdrawal Benefits on Variable Annuities are intended to provide safety of principal on a risk product. These same benefits, when placed on an index product, merely allow the annuitant to take guaranteed payments for life- regardless if their annuity should run out of value. However, index annuities 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. One needs 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,” 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% – 0.50% annually today). An important question to ask when evaluating such is “Can this charge invade the principal of the contract?” Astoundingly, the answer is a resounding “yes” for 70% of these benefits today. This means that one can no longer market the fact that the index annuity’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 on all index annuities with an explicit account value charge for their GLWB.
Each company offering a GLWB has their own names for these features, and even the benefits themselves. Because GLWBs are becoming increasingly competitive, it is in your best interest to analyze the market, to assure that you are offering the right benefit for your client. More importantly, one needs 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, an indexed product resource in Des Moines. She has a decade of experience working with indexed products. She may be reached at sheryl.moore@annuityspecs.com.
