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The variable annuity market has been flooded with products touting their bells and whistles. It can be difficult to keep them all straight and confusing to know which is most appropriate to meet a clients needs.

In reality, however, most popular VA riders fit within 3 basic categories: guaranteed minimum income benefits (GMIBs), guaranteed minimum withdrawal benefits (GMWBs) and guaranteed minimum accumulation benefits (GMABs). Of the 3, GMIBs and GMWBs have been gathering the most sales.

Each of these types of riders has its strengths, and not all are the best fit for certain clients. So, how do you know which to recommend? Start by being sure to understand 3 critical things: how the rider works, who the ideal client is and what the drawbacks are for each rider.

About GMIBs: The key strength of the GMIB rider is that it maximizes income during equity market downturns. These were among the first guarantees that began selling in the late 1990s when the market first started going down. These riders work best for the bear market investor whose primary goal is to minimize the impact of a down market. This client may be looking for a lifetime income stream, and therefore wants to maximize security above all other considerations.

That is a critical measure, because to get the GMIB guarantee, the client is required to give up control over the accounts in the contract. Additionally, once the client annuitizes the policy, the person is out of the market completely.

About GMWBs: One of the most popular guarantees in the market today is the GMWB. This rider evolved in response to some of the limitations posed by GMIBs, especially during bull markets.

The GMWB offers a good safety net during a down-market cycle while also offering up-market potential. The rider protects the clients principal investment and guarantees that the investment can be withdrawn over a set period of time, without annuitization. Additionally, it allows clients to remain in the market, so they can take advantage of equity market upswings.

This contract is best suited for clients who want to remain invested in the market but who need assurance that they wont lose their principal investment if the market cycles down. However, when combined with an option to convert the GMWB to a lifetime income stream, this rider also can meet the needs of the lifetime income buyer. If that is the clients goal, be certain the company offers a conversion provision to do this.

About GMABs: The GMAB guarantee is a “point in time” benefit. It guarantees that clients will get their principal back after a specified number of years, providing they dont make withdraws during that time period.

This guarantee is appropriate for clients who have a number of years before they will need this money and dont mind having some type of asset allocation restrictions. (Note: Most of these guarantees have asset allocation requirements, which force clients to give up control over where they invest their dollars.)

The GMAB guarantee has not been as popular as the GMIBs and GMWBs because of its inherent inflexibility. Unlike with a GMIB or GMWB, most GMABs do not allow clients to make withdrawals without risking a reduction of the guarantee.

Use the chart on this page as a reference tool. It outlines the positioning of each benefit, and the key advantages and disadvantages of each.

The challenge in the living benefit arena of the VA marketplace is to combine the right level of guarantee, or “richness,” with the right amount of flexibility. Typically, the richer the benefit, the less flexible it is.

GMABs offer security during a bear market but may have withdrawal or asset allocation constraints. GMIBs provide a rich benefit, but the annuitization requirement reduces the flexibility and may eliminate liquidity entirely. GMWBs provide maximum flexibility but in most cases without the lifetime income component.

Companies that can bridge the gap and find a way to offer a solid guarantee with maximum flexibility will be doing a true service to both the investor and advisor community.

Delson Campbell is annuity product manager with The Lincoln National Life Insurance Company, an affiliate of Lincoln Financial Group in the Hartford, Conn., office. James Branyan is marketing intelligence consultant with Lincoln, also in Hartford. Their respective e-mail addresses are dcampbell@lnc.com and jbranyan@lnc.com .


Reproduced from National Underwriter Edition, June 4, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.