The riders initially promised to at least return the customer’s money to him over a period of years, but many have morphed into riders that provide a fixed withdrawal rate for life. They may promise, for example, the ability to take 4 percent withdrawals forever, or maybe base the withdrawal level on attained customer age – 5 percent if you’re in your 60s or 6 percent if you’re in your 70s.
For the cost of the rider, the customer buys peace of mind with the knowledge that regardless of how poorly the investment side of the VA does, selecting a GMWB assures a lifetime income and greater flexibility than choosing to annuitize the policy. However, if you’re looking for strong income guarantees, they are available at little or no extra charge with fixed annuities.
Fixed annuities offer minimum rate guarantees that provide assurances of higher lifelong income. For example, a GMWB may give an 85-year-old a 7 percent income for life. But a fixed annuity with only a guaranteed minimum 1 percent interest rate on the premium would provide a withdrawal rate equal to a 17 percent income for the consumer’s life expectancy (based on United States Life Tables 2002). This is based on life expectancy, not lifetime, but I’m only assuming that you earn 1 percent interest (picking an annuity with a 3 percent minimum rate would see that octogenarian past the century mark with a significantly higher income than the GMWB would provide).