Today’s annuity marketplace now hosts a crowd of products that can be used to reach almost any client’s financial goals. Unfortunately, the diversity of this group has generated a problem of its own: Even the most astute financial professional may have difficulty navigating the maze of features that can attach to an annuity. Guaranteed Lifetime Withdrawal Benefit Riders (GLWBs) and Lifetime Income Benefit Riders (LIBRs) are two of the more easily confused rider options in a market where understanding the nuances can make or break a client’s financial plan. Understanding the basics is necessary, but it is the fine print that will prove critical in ensuring that each of your clients purchases the perfect annuity product.
GLWBs versus LIBRs
While each type of annuity income rider essentially guarantees that the client will receive a certain amount of income throughout retirement — regardless of market performance — there are important differences that set these two product features apart.
GLWBs guarantee that the client will be able to withdraw a certain percentage of the value of the client’s benefit base, which has been growing by a guaranteed amount over the course of the deferral period (the guarantee is commonly somewhere between 4 and 8 percent). Clients looking for larger payouts later in life should be advised that the longer the base account is allowed to grow, the larger the withdrawals will be in the future. Further, it is important that the client understand that he must stay within the limits of the guaranteed withdrawals; some contracts provide for termination of the feature if the client takes an excess withdrawal.
An LIBR, while similar, is a rider pursuant to which the annuity carrier agrees to pay income over the client’s lifetime in the form of an annuity. The income stream that results once the client annuitizes the contract is also drawn from a benefit base, but the carrier uses the client’s life expectancy to determine the value of the guaranteed income payments. Clients seeking out steady, level annuity payouts that are guaranteed regardless of how long they live are often attracted to this type of feature.
One common ground between these types of riders lies in the fact that the benefit base itself is not available for cash withdrawals. This “account” has no real current cash value to the client — meaning that, unlike the accumulation value of the account, the client cannot access this value through surrendering the contract prior to the end of the deferral period.
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The Fine Print
Once the type of rider is chosen, a new inquiry must begin so that the client understands the various options associated with the rider itself. The cost factor — the fee for the rider — is one important consideration. The fee for a GLWB or LIBR can be based on the annuity contract’s income value or accumulation value (investment portion of the contract), though it will be deducted from the accumulation value over the life of the contract.