EIGHT QUESTIONS TO ASK ABOUT GUARANTEED LIFETIME WITHDRAWAL BENEFITS
Michael H. Korthaus

Mike Korthaus is Vice President, Financial Institution Sales, Protective Life Insurance Company (Birmingham, AL). He can be reached at (513) 362-1553 or via email at mikekorthaus@protective.com.
 
 

THERE ARE a large number of Guaranteed Lifetime Withdrawal Benefits (GLWBs) available today within variable annuity products, each with its own unique features and provisions. They can be an excellent source of accumulation during the planning phase of retirement as well as income during the distribution phase.

With these features, variable annuities provide an attractive alternative for individuals nearing or in retirement. With features that can provide downside protection, allow for upside potential of the markets and then provide significant increasing lifetime income possibilities, variable annuities provide advisors with many choices for retirement solutions. However, understanding them and being able to translate those feature-rich product solutions to clients for their retirement needs can be very challenging.

If excess withdrawals are not monitored closely, they can reduce or even eliminate the lifetime withdrawal benefit that your client is depending on.

With the ever-expanding nature of GLWBs, it has become more crucial than ever that financial advisors know what to look for in the benefits they offer to clients. Here are several key questions you should be asking your variable annuity wholesalers as well as the kinds of answers you should be looking for.

1. What interest rate is used in calculating the benefit base roll-up?

While not all GLWBs include a roll-up feature, they are increasing in popularity, so it's important for you to know this answer. Roll-up features ensure that a contract's benefit base (the amount on which the guaranteed withdrawals are based) will increase at a guaranteed level, regardless of investment performance (generally adjusted for withdrawals), for a specified period of time. With these types of features, contract owners have the additional security of knowing that no matter what impact market fluctuation may have on the contract's account value, their benefit base (the amount that will determine the amount of the available guaranteed lifetime withdrawals) will increase at a minimum guaranteed level.

GLWB features can vary significantly from company to company and even from contract to contract within the same company.

The answer you get will likely range between 4 percent and 7.25 percent.

2. Is the benefit base roll-up calculated using simple or compounded interest?

The difference between simple interest and compound interest over time can be significant. Let's look at an example of the difference between the benefit base value when you have a simple interest rate versus a compound rate. Assuming an initial deposit of $100,000, the value of the benefit base for the following situations would be:
» 5% simple after 10 years vs. 5% compound rate after 10 years: $150,000 vs. $162,889
» 7% simple interest rate vs. 7.2% compound rate after 10 years: $170,000 vs. $200,423

3. How long is the roll-up period?

When comparing GLWB options it's important to know how many years the roll-up is guaranteed. This period of time usually ranges from five to 10 years.

4. When can the roll-up period be reset and for how long?

Many GLWB options available today will offer a reset opportunity of some sort. Many times the reset occurs any time the market performance of the underlying variable account value actually exceeds the guaranteed roll-up amount.

5. Will early withdrawals interrupt or terminate the roll-up featuer?

Many of today's GLWB options include provisions that will result in termination of the roll-up period if a withdrawal is taken during that roll-up period. Others may have provisions that interrupt the roll-up period.

6. When can the benefit base be stepped-up and for how long?

Unlike roll-ups, step-ups do not guarantee a specified increase in the benefit base amount, but they do offer opportunities for clients to capture market gains in their benefit base by increasing the benefit base to the current contract anniversary account value. The number of years step-ups are offered varies from carrier to carrier.

Many products require that the GLWB option be purchased at the same time the variable annuity contract is initiated. Others offer some flexibility as to when the rider can be added.

7. How are excess withdrawals treated?

Excess withdrawals are withdrawals taken above and beyond the amount provided by the GLWB's annual withdrawal amount. The way these withdrawals are treated can vary significantly from product to product. Most excess withdrawals will affect the contract's benefit base, sometimes on a proportional basis and sometimes on a dollar-for-dollar basis. Many products offer exceptions for excess withdrawals taken to meet required minimum distributions.

When comparing GLWB options it's important to know how many years the roll-up is guaranteed. The period of time usually ranges from five to 10 years.

Excess withdrawals may even impact step-up provisions or cause the benefit base to be reset to the current account value, negating any step-up or roll-up that had locked in previous market gains. Once you understand the effect that provisions such as these can have on your client's guaranteed withdrawals, it will be clear that this is one of the most important questions you need to ask. If excess withdrawals are not monitored closely, they could reduce or even eliminate the lifetime withdrawal benefit that your client is depending on to meet retirement income needs.

8. Can the GLWB rider be added (and paid for) later?

Many products require that the GLWB option be purchased at the same time the variable annuity contract is initiated, regardless of the client's time horizon for planning to utilize the rider's benefit. Others offer some flexibility as to when the rider can be added.

For clients who are interested in adding a GLWB at some point, but who are not yet ready to commit to the fees and restrictions that are associated with the rider, flexibility in when they can purchase the rider can be a key selling feature. For these clients it can offer the opportunity to delay additional fees while accumulation, not income, is the primary objective; it then offers the option of adding the security of guaranteed income when the client decides the time is right. While this option may not be a suitable choice for everyone (for instance, those who want to begin building a minimum benefit base immediately), it does offer an option to customize living benefits to meet individual clients' needs.

GLWB features can vary significantly from company to company and even from contract to contract within the same company, so it crucial that you work closely with your wholesalers to understand how the features work. You should also make sure to consider what client-friendly options and features the GLWB offers and whether or not they offer the flexibility your client needs.