GMWBs Move Up As Another Living Benefit Guarantee In VAs
The past five years have seen a considerable amount of product design creativity in the area of living benefit guarantees on variable annuities.
The two primary approaches to such guarantees have been guaranteed minimum income benefits and guaranteed minimum account balances. Now, a new guarantee is on the rise, and the market will want to follow it closely.
First, here is a recap of the mainstream guarantees:
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GMIBs guarantee a minimum life-contingent payout if the policyholder annuitizes after the VA has been in force for a defined minimum waiting period, usually seven to 10 years.
GMABs guarantee a one-time adjustment of the policyholders account value to a defined account value floor on a specified date, if the actual account value at the time is lower than the floor.
Both GMIBs and GMABs have advantages and disadvantages. Some people are critical of GMIBs because, to realize the guarantee, the policyholder must annuitize the VA under a life contingent payout. On occasion, the longer waiting period is also cited as a negative for GMIBs. As for GMABs, they are sometimes viewed as either too expensive or too restrictive in the choice of variable subaccounts that are available to maintain the guarantee.
Today, however, a third approach to guaranteed living benefits in VAs is emerging. Called a Guaranteed Minimum Withdrawal Benefit–the GMWB–it has characteristics of both the GMIB and GMAB and has been available in VAs of several carriers for some time. Today, a number of new GMWB designs are in the pipeline at many different insurers, so the feature is now drawing much broader attention.
Under a GMWB, the policyholder is not required to annuitize the VA in order to enjoy the guarantee benefits.
On the other hand, the contract holder cannot withdraw the fully guaranteed account value in one lump sum. Instead, the GMWB permits the contract holder to withdraw each year up to the stated percentage (typically 7% to 10%) of total premiums paid, irrespective of the contracts actual account value.