Can This Annuity Rider Help Your Client Through Rough Markets?

A GLWB allows clients to remain invested in the market while locking in a guaranteed retirement income stream.

Volatile market conditions have a way of reminding clients about the power of annuity products and the value of lifetime income guarantees in the face of uncertainty. With interest rates rising, now may be the perfect time for many pre-retirees and recent retirees to consider whether an annuity is right for them.

If interest rates surge in the coming months as expected, it’s important for advisors to be prepared to discuss the various options that clients may find appealing — in addition to the tax benefits of the annuity itself.

When it comes to variable annuity purchases, clients may be particularly interested in learning more about guaranteed lifetime withdrawal benefits (GLWBs), which can add flexibility for clients who may still be on the fence about locking funds down within the annuity structure.

GLWBs: The Basics

Annuity income riders essentially guarantee that a client will receive a certain amount of income throughout retirement — regardless of market performance. Once the client begins to receive payouts, those payouts are guaranteed for life, even if the client’s funds within the annuity structure perform poorly.

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 accumulation period, at any time and without incurring a penalty (including during the accumulation phase). 

In other words, an annuity with a GLWB can allow the client to remain invested in the market while still locking in a guaranteed stream of income in retirement.

The amount of the GLWB withdrawal that is available will be subject to an annual cap, which serves to ensure that the client will still have annuity funds to draw upon later in life. Typically, the guarantee will allow the client to withdraw between 5% and 10% under the rider.

Because GLWB riders allow the client to avoid surrender fees and penalties when making “early” withdrawals under the rider, they will also increase the overall cost of the annuity. Some carriers allow the client to choose whether the GLWB rider fee will be deducted from the annuity’s principal amount or from the withdrawals made under the rider. In most cases, the fee will be between 0.5% and 1.5% of the annuity’s overall cash value. 

Some annuity carriers also provide an option for clients to cancel these riders, though some impose a waiting period (which can be as long as five years) before the client can cancel and may provide that the rider may not be reinstated after it is canceled.  

Weighing the GLWB Option

When a client purchases a variable annuity, the funds invested continue to grow and earn interest during an accumulation phase. Typically, clients incur a steep penalty if they make withdrawals in that accumulation phase.

The primary attraction of the GLWB feature is that it allows clients to make withdrawals without incurring penalties or worrying about surrender fees. Clients are often wary of locking money into an annuity because they might need the funds for unanticipated expenses. In reality, clients can make withdrawals under the rider for any reason, so if market conditions improve, the client may be able to make withdrawals to invest in higher growth options. 

Still, if the client regularly takes advantage of the GLWB withdrawal option during the annuity accumulation phase, that will reduce the overall annuity principal balance. Once the client reaches retirement, they may find that their annuity income is lower than initially expected.

Clients should also consider the tax implications that come with making GLWB withdrawals. The tax treatment will depend on whether the client purchased the annuity with pretax or after-tax dollars (and the tax treatment of annuities can be extremely complicated).

Clients who don’t intend to take withdrawals from their annuity should be advised that it’s possible that the cost of the GLWB may outweigh the benefits.

Conclusion

GLWB riders provide flexibility to help overcome many of the traditional client objections to annuities. Still, these and other annuity riders are extremely complicated — and it’s important to evaluate all of the options before advising clients on whether a GLWB rider is right for them.

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