It has been nearly 20 years since the first guaranteed minimum living benefit (GMLB) riders were introduced on variable annuity contracts. Before that, principal protection was only offered in case of death.
Since then, different types of living benefit riders have been introduced, and these options have become popular on both variable and fixed index annuity products. The Insured Retirement Institute estimates about 74 percent of variable annuity sales in 2015 included guaranteed living withdrawal or guaranteed minimum income benefits.
IRI outlines six types guaranteed minimum living benefit riders in its 2016 IRI Fact Book. Are you versed in the definition and mechanics of each?
Continue reading to learn more about each type of rider…
A GMIB guarantees that the annuitant will receive a minimum value’s worth of payments. (Photo: iStock)
Guaranteed minimum income benefit
A guaranteed minimum income benefit (GMIB) rider is designed to provide the investor with a base amount of lifetime income when the annuitant retires regardless of how the investments have performed. It guarantees that if the owner decides to annuitize the contract (for life, life plus a certain period, or the lives of two people), payments are based on the greater of the contract value, or the amount invested credited with simple or compound “interest” at a rate of 1 percent to 4 percent. The “interest” creates a notional balance upon which annuity payments can be calculated; it does not represent account or cash value. An investor must annuitize to receive this benefit, and there is typically a 10-year holding period before it can be exercised. Age limits may also apply.
See also: 7 facts about annuities you should know
A GMAB guarantees the minimum amount received by the annuitant after the accumulation period is either the amount invested or is locked in gain. (Photo: iStock)
Guaranteed minimum accumulation benefit
A guaranteed minimum accumulation benefit (GMAB) rider guarantees that an owner’s contract value will be set at least equal to a certain minimum percentage (usually 100 percent) of the amount invested after a specified number of years (typically 10 years), regardless of actual investment performance.
See also: A lesson in annuity riders: GMIB vs. GWB
GMWBs provides annuitants with another option for funding their retirement. (Photo: iStock)
Guaranteed minimum withdrawal benefit
First introduced in 2002, a guaranteed minimum withdrawal benefit (GMWB) rider guarantees that a certain percentage (usually 4 percent to 6 percent) of the amount invested can be withdrawn annually until the entire amount is recovered, regardless of market performance. (Reducing withdrawals in one year generally does not allow for increased withdrawals in subsequent years. However, if a contract owner defers withdrawals and the account value grows and is “locked in” at certain points as the new “benefit base,” the amount of subsequent withdrawals allowed may be larger.)
If the underlying investments perform well, there will be an excess amount in the policy at the end of the withdrawal period. If they perform poorly and the account value is depleted before the end of the withdrawal period, the investor can still continue to make withdrawals until the full amount of the original investment is recovered.
If the investor decides to terminate the contract before the end of the withdrawal period, he or she will receive the cash surrender value of the contract.
See also: VAs get new GMWB options
A GLWB rider allows minimum withdrawals from the invested amount without having to annuitize the investment. (Photo: iStock)
Guaranteed lifetime withdrawal benefit
Another type of GMWB rider that promises withdrawals for life was introduced in 2004. The guaranteed lifetime withdrawal benefit (GLWB) guarantees that a certain percentage (typically 3 percent to 5 percent, often based on age) of the amount invested can be withdrawn each year for as long as the contract holder lives. This percentage may vary depending on the person’s age when withdrawals begin, whether the payment is guaranteed to continue for the life of one (single life) or two (joint life) individuals, and in some of the newest structures based on the level of an external benchmark such as the 10-year Constant Maturity Treasury Rate.
In many GMLBs, “step-up” features periodically, e.g. annually or every five years, lock in higher guaranteed withdrawals if investments do well. “Roll-up” features, conversely, increase the amount that may be withdrawn (by increasing the “benefit base” used to calculate withdrawals) during the deferral period, i.e. prior to the commencement of withdrawals. Allocation to a balanced or volatility managed fund, adherence to an asset allocation program, or a minimum allocation to a fixed or fixed-income subaccount is often required when electing a GMLB. The liability risk to the insurer may also be managed through dynamic rebalancing, which shifts allocation toward more conservative investment options when equity returns are negative and/or market volatility increases.
SALB riders provide flexibility with regards the types of assets that are protected. (Photo: iStock)
Stand-alone living benefit
The stand-alone living benefit (SALB) was introduced in 2008. The SALB provides protection similar to that of the GLWB while adding flexibility with the various types of assets that can be protected. It is designed to be attached to a balanced fund by endorsement, primarily for use as an option in an employer-sponsored retirement plan. Development of the market for these products has been slow due to ambiguity around the fiduciary responsibilities of the plan sponsor in selecting an insurance carrier, and issues around portability that makes it difficult for the plan participant to move the benefit when changing employers.
See also: Advising on guaranteed living benefits
Some annuity contracts have features designed to address aging Americans’ concerns about long-term care. (Photo: ThinkStock)
Long-term care protection
Many annuity contracts permit owners to withdraw money for long-term care needs without incurring surrender chargers. Surrender chargers may be waived if, for example, a contract owner has been confined to a nursing home for a minimum period or has suffered a critical illness. Additional benefits may be offered, such as eldercare resources, referral and consultation services, and discounted long-term care services from a specified group of providers.
With the enactment of the Pension Protection Act of 2006, new hybrid products that combine annuities with long-term care were introduced. Beginning in 2010, tax-free distribution status was given to both annuity assets and long-term care rider benefits used for a qualified long-term care purpose. Under prior law, withdrawals taken from the annuity to pay the long-term care premiums were taxable and subject to a 10-percent penalty prior to age 59.5. Insurance carriers have also developed true insurance benefits for long-term care, such as riders which double the lifetime withdrawal payment of a GLWB when the contract owner is confined to a nursing home.
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