Prior to about 1997, principal protection under variable annuity contracts was offered only in the case of death. In 1997 the first Guaranteed Minimum Income benefit was issued, which offered contract holders the opportunity to generate annuity income from the greater of the account value or a guaranteed minimum amount based on the premium, after a multi-year waiting period. In subsequent years insurers developed other “living protections” against investment and/or longevity risk in variable annuity contracts by guaranteeing minimum accumulation values or withdrawal amounts. Some type of living benefit rider is offered on 62 percent of variable annuity contracts sold.*
*Source: Insured Retirement Institute IRIOnline.org
Various types of guaranteed minimum living benefit (GMLB) riders are described below. Besides offering these in new contracts, some companies allow them to be added to existing contracts. Guaranteed living benefits are usually offered as riders to variable annuity contracts for an optional charge.
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 they retire 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.
Guaranteed Minimum Accumulation Benefit
A guaranteed minimum accumulation benefit (GMAB) rider guarantees that an owner’s contract value will be 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.
Guaranteed Minimum Withdrawal Benefit
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(GMWB) rider guarantees that a certain percentage (usually 4 percent to 6 percent) of the amount invested can be withdrawn annually until the entire amount is recovered, regardless of market performance.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.
Guaranteed Lifetime Withdrawal Benefit
Another type of GMWB rider that guarantees withdrawals for life is the guaranteed lifetime withdrawal benefit (GLWB). This guarantees that a certain percentage (typically 3 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.
Long-Term Care Protection
Some annuity contracts have features designed to address aging Americans’ concerns about long-term care (LTC). Many contracts permit owners to withdraw money from their contracts for long-term care needs without incurring surrender charges. Surrender charges 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. Insurance carriers have also developed true insurance benefits for LTC, 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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