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.
And the results? The GLWB with the 25% bonus provides the highest lifetime payout at age 65.
So, if the owner intends to begin taking payouts as soon as possible, the GLWB with the strongest payout factor or biggest bonus may well be the “best” solution.
But what if the owner probably won’t begin taking an income for 10 years or more and is, instead, looking for some certainty? In that case, a strong income growth factor becomes important.
From the chart, it is clear that the 8% growth factor GLWB guarantees a lifetime income of $12,954 at age 75. But the GLWB with a 7% growth factor pays a higher $13,017 at age 75. Why is that? Because the 7% GLWB increases the payout percentage by 0.1% for each year withdrawals are delayed, basing the payouts on 6.5% of value, while the 8% GLWB has a payout factor of 6% because it only increases the payout factor once each decade.
The payout factor, then, is just as important as any guaranteed income benefit growth factor.
But there is more to the story. Notice that the 8% GLWB will guarantee payout increases for 15 years while the 7% GLWB stops guaranteed growth after 10 years. Therefore, the 8% GLWB wins–is “best”–at age 80.
Admittedly, the 15-year income benefit growth guarantee may not be terribly important to a 65-year-old who intends to begin receiving an income in the 70s; but it may be very desirable for a 55-year-old looking to buy an annuity today. So, again, which is “best” depends on the situation.
What these calculations show is, the right GLWB depends upon the goals and assumptions of the particular case.
If the consumer is not taking income until a future date, and is pessimistic about the future, then long and strong income account growth guarantees should make sense. If the withdrawals will begin in a year or two, then the highest payout factor or the biggest initial bonus may point to the sensible annuity. However, if the annuity is not purchased with the intention of using it for lifetime income, then it is hard to justify paying for a GLWB benefit at all.
Jack Marrion is president of Advantage Compendium, Ltd., a St. Louis based research and consulting firm. His e-mail address is [email protected]