Variable annuity issuers generally offer 3 types of guaranteed living benefits: guaranteed minimum income benefits (GMIB), guaranteed minimum accumulation benefits (GMAB) and guaranteed minimum withdrawal benefits (GMWB).
The typical GMIB entitles the owner to annuitize after a specified period. The payments are based on the greater of actual contract value or a payout base (usually the premiums paid credited with a stated rate of interest).
Typical GMABs guarantee that the contract value will be at least equal to the initial investment after a specified period, regardless of market performance. If it is not, the insurance company will automatically increase the account to bring it up to the guaranteed minimum.
Finally, GMWBs guarantee the systematic withdrawal of a certain percentage of premiums annually, again regardless of actual performance. Early GMWB designs guaranteed annual withdrawals of a specified percentage–usually 7%–until the original investment had been fully recovered.
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More recent versions of GMWBs offer a guaranteed lifetime withdrawal benefit (GLWB). This guarantees withdrawals for life, regardless of subsequent account value. The annual maximum GLWB amount typically ranges from 4% to 7% of the benefit base; the percentage varies based on age when the first withdrawal is taken.
These living benefits, which provide principal protection against downside market risk during the contract owner’s lifetime, have been the dominant driver of VA sales over the last 4 years. Despite the stock market’s recovery and recent positive returns, the persistent choppiness of the market and lingering memories of the bear market of 2000-2002 continue to fuel investors’ desire for retirement products with these types of guarantees.
It appears that many investors remain reluctant to invest in the equity market for fear of losing money, notwithstanding the fact that this market has historically produced the highest returns. Guaranteed living benefits on VAs give people the needed confidence to participate in the market, since they know they will be protected against financial loss in the event of untimely downturn during their lifetime.
The strong appeal of the protections provided by living benefits can be seen in recent industry sales figures.
In 2003, approximately 50% of new VA sales were from contracts providing some form of living benefit guarantee.