One variable annuity rider that drew little attention during the boom years seems to be gaining more notice among today’s skittish investors: the guaranteed minimum accumulation benefit.
“Based on the dramatic losses in asset value in 2008, the investing public is starting to learn just how significant a rider like this can be to the overall portfolio,” says Timothy Gahler, a senior annuity product specialist at Thrivent Financial for Lutherans, Minneapolis, Minn.
“Consumers who purchased a guaranteed minimum withdrawal benefit are now wishing they had a guarantee on their assets, rather than a withdrawal guarantee.”
Adds Ethan Young, a manager of Annuity Research at Commonwealth Financial Network, Waltham, Mass.: “For clients who want piece of mind, need to be in equities and otherwise would be too risk-averse to be invested in the stock market, the GMAB can help them stay the course. And with fees ranging from 35 to 65 basis points, the rider is relatively inexpensive compared to other guaranteed living benefits offered on VAs.”
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The GMAB rider allows investors to protect principal by either locking in growth or accepting the annuity company’s guaranteed return during a set term, such as 10 years. At the end of the term, the account value will be the greater of the contract value or the GMAB value. Upshot: no matter what happens in the markets, the client’s investment is protected for at least the GMAB’s term.
The GMAB’s key attraction–the ability to walk away at the end of contract period with a guaranteed lump sum–is making the rider increasingly attractive to market-wary investors. If the economy contracts further, observers say, interest in the rider among prospects will likely grow.
Enthusiasm for the benefit isn’t shared by all product manufacturers. Paradoxically, fewer insurers are offering the rider than in years past–or else jacking up its fee–because of the heightened risk of making good on the guarantee during a downturn, points out John Olsen, John L. Olsen, a chartered financial consultant and principal of Olsen Financial Group, Kirkwood, Mo.
“The guaranteed amount has to be paid in one lump sum, rather than over time, which would be easier on the carrier’s cash flow,” says Olsen. “My impression is that many insurers have crunched the numbers and determined that in an environment of extreme volatility, [offering the rider] is simply too big a risk to take for what they’re charging.”
Sources say the GMAB is most appropriate for the conservative to moderate investor who has a long-term investment horizon, typically 7 to 10 years. The key motivators for buying the rider are its guarantee of principal protection and, secondarily, the potential it offers for growth.
When attached to a VA, the rider is often compared to a fixed indexed annuity, which also offers upside potential with no downside risk. But unlike FIAs (the value of which will vary according to a complicated interplay of the vehicle’s gain formula, participation rate and market value adjustment), a VA with GMAB enjoys unlimited upside potential.
True, the client pays a fee for the rider. But one can argue that the FIA’s cap on market gains is itself a hidden, and potentially larger, cost.