Like other annuities, index annuities attempt to differentiate themselves from one another in various ways.
For instance, from offering 3 basic interest crediting methods in the mid-1990s, the products expanded to offering over 40 variations by 1999. Index annuity carriers have also played with offering different indices, trailing commissions, and even a rider to help pay taxes on accumulated interest upon death.
But none of these changes truly excited the marketplace.
Now the index annuity industry is adding a new innovation — living benefit riders or options, in particular the guaranteed living withdrawal benefit. This article examines the new GLWB design and its marketplace potential.
To develop these features, index annuity carriers borrowed from variable annuities, where living benefit riders guarantee a better death benefit, greater certainty of income, or provide a few other benefits.
In VA products, such riders are designed to lower the risk of owning an investment. In index annuities, where the product already offers strong downside protection, the GLWB adds strong income protection. Here is how this came about:
In June 2006, the first guaranteed lifetime withdrawal benefits were introduced in indexed annuities.
For those familiar with GLWBs in VAs, these were a second generation version of the guaranteed minimum withdrawal benefit (GMWB). Where original GMWBs on VAs would typically offer clients [7%] annual withdrawals until a return of their principal, the new GLWBs enhanced that by giving the client the option for return of principal through [7%] annual withdrawals, as well as an option for [5%] annual withdrawals for life, even if the account value falls to zero.
This was a brand-new value proposition for VAs, and it wasn’t long before just about every carrier in the GMWB market was offering this new type of benefit.
Index annuity carriers waited by the sidelines for nearly 2 years after the first VA-GLWB debuted before launching their own such benefit. 2 carriers in particular dove in at the same time. Both introduced GLWB riders in exchange for a 0.40% charge (deducted annually from the account value). Both allowed the client to terminate the benefit at the client’s request. And both determined withdrawal percentages according to annuitant age (e.g., those aged 70-74 receive 6% annual withdrawals).
Carrier #1 chose to take a more simplistic approach in design, with clients being given the option for 5%, 6%, or 7% withdrawals for life, based on age.