The annuity industry gets into trouble occasionally by not discouraging the overselling of potential returns; now some in the business are doing the same thing with guaranteed lifetime withdrawal benefits in annuities.
E-mails are coming into my office from consumers saying they were told their variable annuity was “guaranteed to double in value in 10 years. “
Meanwhile, some index annuity ads are talking about guaranteeing 6%, 7%, 8% annual growth or an upfront income account bonus. These ads do state that this growth is on the value of the guaranteed income account, but the disclosure is inadequate and does little to build consumer understanding of what GLWB guarantees really mean.
These problems may well result in another round of class action lawsuits against industry providers, plus unwelcome regulatory attention in the future.
So, what do the GLWB guarantees really mean? These growth guarantees are designed to generate a higher level of guaranteed lifetime withdrawals.
Suppose a 60-year-old puts $100,000 into an index annuity and earns a net 4% forever. By age 70, the annuity would have an actual account value of $148,024. The guaranteed lifetime withdrawal benefit payout rate for a 70-year-old under many GLWB riders is 6%, so the person could withdraw $8,881 until death.
Let’s say a new annuity comes along that guarantees 10% annual GLWB “income account growth” for 10 years. This policy would produce an “income account value” of $259,374 after 10 years. At a 6% payout rate, this $259,374 would generate a lifetime income flow of $15,562 a year–a big difference from the $8,881/year payout the owner would receive if 6% payouts are based on actual account value.
But if the owner believes he/she could receive the full $259,374 by cashing in the annuity after 10 years, when at age 70, the client is bound to be unhappy. That’s because, for cash-outs, owners only receive the actual account value (in this case, $148,024 minus any surrender charges). The guaranteed income account growth value (i.e., 10% growth over the first 10 years) is only for the income guarantee; it has no relationship with growth of the policy’s actual account value.