An increasing number of fixed indexed annuities (FIAs) are now sold with guaranteed lifetime withdrawal benefits (GLWBs). Though common historically on variable annuities, GLWBs on FIAs are something of a new phenomenon as is policyholder behavior in regards to the utilization of those riders.
With that in mind, Ruark Consulting, LLC recently undertook its first-ever study of partial withdrawals on FIAs.
Under a partial withdrawal provision, a policyholder can take cash out of the contract before the lifetime income benefit commences, although they will pay a penalty. However, as Peter Gourley, vice president at Ruark, points out, most contracts allow the policyholder to take a “free” withdrawal amount (typically 10 percent of the contract) in any given year without paying a surrender charge.
To gauge policyholder behavior in regards to partial withdrawals, Ruark reviewed more than 8 million contract years of exposure between January 2006 and September 2012 submitted by 11 companies, including most of the major FIA writers. Highlighted was the partial withdrawal experience under those contracts, even those without a GLWB. (Ruark declines to reveal exact statistics, characterizing the results only in generalities.)
Overall, Gourley admits the results diverged a bit from conventional wisdom. For instance, the company found that having a free withdrawal option had “a significant effect” on withdrawal behavior, including those with a lifetime withdrawal feature.
In other words, taking those free withdrawals becomes ingrained in the contract owner’s behavior. Even though they know taking those free withdrawals ultimately cuts into the guarantee, they continue to taking them. “It might be the guarantee is not the foremost reason they are buying the contract as much as the immediate cash need of the free withdrawal amount,” Gourley speculates.
Although policies with the GLWB rider take withdrawals less frequently than those without that clause and less by amount prior to turning on the lifetime income, the withdrawals “are still at levels that are detrimental to the guarantee,” notes Ruark in its summary of the study. Both the firm and its clients were “surprised” by that finding.
Since policyholders pay extra for the GLWB rider, having that guarantee would, in theory, dampen the taking of early or excess withdrawals. For example, in a typical GLWB rider, a policyholder waits until 65 to take 5 percent of the contract’s guaranteed value out every year for life. If they withdraw more than 5 percent, the guarantee is reduced proportionately. Taking withdrawals before age 65 further diminishes the guarantee.