The minimum guaranteed withdrawal benefit for life on variable annuities is often mentioned as a logical solution to a customer’s income needs.
Also called the life withdrawal benefit, or LWB, it has a number of very attractive features that help overcome the typical consumer objections to annuitization. But an older VA design, the variable income annuity or VIA, was also built to provide an income that cannot be outlived.
This poses the question: Has the LWB made the VIA solution obsolete? Let’s see.
The LWB allows a customer to take out a fixed percentage of a withdrawal base every year for life. The percentage usually depends on client age at start of withdrawals. This base often ratchets up if there is favorable investment performance before the first withdrawal.
Once withdrawals begin, the opportunity exists for the customer to “re-set” the benefit if the account value has grown above the withdrawal base. (Note: In these situations, the insurance company may be able to increase the benefit charges.)
If the withdrawals exceed the “benchmark” amount (i.e., the percentage multiplied by the withdrawal base), the benchmark amount will reduce proportionally. But as long as the benchmark is not exceeded, the insurance company guarantees the customer can withdraw at least the benchmark amount each year the annuitant is alive–even if the VA account value drops to zero. Typically, the guarantee is conditional upon adhering to specified asset allocation rules.
Unlike a traditional income annuity, these products include a meaningful guaranteed death benefit (which is reduced by withdrawals); and the customer is free to surrender the contract anytime before the mandatory annuitization date.
What about the VIA? This is an immediate annuity. That fact means the liquidity is typically very limited, and the pattern of income payments has very limited flexibility once annuitization begins. Moreover, the death benefit is generally confined to the choice of the guarantee period of income payments.
Does the VIA deliver value to customers that compensate for its perceived faults? It is a matter of trade-offs.