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February 07, 2011 at 07:00 PM
New York state insurers must warn users of annuity guaranteed minimum withdrawal benefits GMWB) of the possible effects of excess withdrawals on future access to withdrawals.
New York State Insurance Department officials talk about the need for GMWB excess withdrawal warnings in Circular Letter Number 5 (2011), which is addressed to all life insurers and fraternal benefit societies authorized to do business in New York.
A GMWB gives an annuity holder the ability to continue withdrawing guaranteed amounts regardless of the amount of value remaining in an annuity contract.
“A GMWB generally provides for a reduction in future guaranteed minimum withdrawal amounts if the contract owner withdraws money in excess of the guaranteed withdrawal amount,” officials note.
“The reduction in future amounts is typically made on a proportional basis, where the reduction equals the guaranteed withdrawal amount times the ratio of the excess withdrawal amount to the account balance (after the reduction for the withdrawal benefit, but prior to the excess withdrawal),” officials say.
Because of the nature of the reduction formula, the reduction in the guaranteed withdrawal amount may appear to an annuity holder to be disproportionate compared to the excess withdrawal amount, officials say.
“For example,” officials say, “when the guaranteed minimum withdrawal amount is $100 and the contract owner withdraws $180, the excess withdrawal amount is $80 ($180-$100). Assuming the value of the annuity contract is $500, the guaranteed minimum withdrawal amount would reduce the value of the annuity contract to $400 ($500-$100). The excess withdrawal amount further reduces the value of the annuity contract to $320 ($400-$80). The excess withdrawal results in a permanent reduction of the annual guaranteed withdrawal amount by 20% (80/400) to $80 per month.”
