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April 19, 2009 at 08:00 PM
Today’s annuities have many types of guaranteed lifetime withdrawal benefit features. This raises the question: which is the best GLWB?
The answer depends.
Although marketed under different names, all GLWBs share the same core benefits: The owner may withdraw a percentage of the annuity value for life, even if the annuity cash value drops to zero; and because the owner retains control over the annuity, the owner has the flexibility to change or stop the payout and to cash in all or a portion of the annuity.
The products share the same purpose, too: to take away the fear of running out of income and to preserve hope by letting the consumer keep control of the asset.
Carriers have attempted to differentiate the products in various ways. Some emphasize a strong immediate bonus on the income payout; others guarantee an annual increase in the potential income payout regardless of how the underlying cash account performs; and still others give a persistency bonus that increases the payout percentage based on both age and time the policy has been in force.
In addition, some GLWBs increase payouts if the owner is hospitalized. Others increase the payout amount each year as a kind of inflation adjustment factor.
The result is that the “best” GLWB depends upon when the customer thinks he or she will need the payout, and on what the customer assumes about the future.
The chart illustrates with a performance comparison of 4 GLWB formats. The calculations assume $100,000 was placed in each annuity with an issue age of 65. The payout account value is based on the assumptions shown. To obtain the initial annual lifetime payout, these values were multiplied by the respective payout factors at ages 65, 70, 75 and 80.
The chart shows the initial guaranteed lifetime payouts that would be received if each annuity earns the displayed income benefit growth factors.
The figures do reflect a little fudging. For instance, although many annuities require a 1-year waiting period, the charts assume the age 65 buyers could immediately begin taking annual income. Also, the charts ignore premium bonuses unless the bonus was built into the GLWB.
