We have written in the past about concerns with the proliferation of benefits provided to variable annuities through the various riders that have come to market in recent years. In particular, we are concerned that 1) many consumers will not truly understand the impact of these riders on the pricing of their VAs, and 2) insurers may not always have correctly priced the features.
Moreover, some of these rider features have been difficult for consumers to understand, even when they receive statements of contract value. The benefits often require complex computations in order to determine their actual value.
Many of these riders are now finding their way into index annuities and even into traditional fixed annuities.
With the expansion of these features, a clear understanding of how they work is essential–an understanding that is not always available to contract owners.
Case in point: A friend of ours, a senior executive of a mainstream insurer, recently pointed out that the guaranteed minimum withdrawal benefit (GMWB) enables contract owners to determine correctly the benefit value merely by looking at the account statements most insurers provide, but this often is not the case with the guaranteed minimum income benefit (GMIB).
When contemplating a GMIB, the average consumer arrives at the simple conclusion that the benefits received will always be at least the percentage of the original premium specified in the rider. Thus, a 6% GMIB on a $100,000 investment would yield the greater of $6,000 per year or the annuity payment determined by the standard method for VAs.
Unfortunately, in many instances, GMIBs are not that simple and can be confusing and capable of misinterpretation. In fact, some of the ways GMIBs are sold sound almost too good to be true, at least for the price charged for the rider.
As our friend noted, an annuity contract owner with a GMWB can look at the periodic statement and easily determine how much the guarantee will yield in monthly distributions. Such a determination is generally not possible with a GMIB.
Yet, a GMIB, particularly with a variable annuity or an index annuity, is a valuable feature, one that can eliminate a great deal of the risk that is inherent in such types of investment. Anyone who survived the adverse stock market conditions of 2000 to 2002 can testify to the problems facing taking annuity payments from a VA that did not have a GMIB feature–particularly if the annuity payment was the sole source of income. The purchasing power of the monthly annuity payments would have been seriously eroded by the decline in value of the portfolios underlying most such VAs. That is the problem GMIBs were designed to solve.
We continue to believe that annuity payments, as opposed to mere withdrawals from an annuity, afford a superior form of retirement planning.