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.