A guaranteed lifetime withdrawal benefit (GLWB) is a rider that can be added to a variable annuity contract, ensuring a minimum payout level even if market downturns reduce the cash value of the contract. These riders usually allow for additional withdrawals from the cash value. However, you will typically pay annual fees for this rider, which vary based on the issuer.
Key Takeaways
- A GLWB rider provides protection against market losses when added to a variable annuity.
- GLWBs may offer a “stepped-up” benefit if the investments in subaccounts gain value.
- Riders are optional and accompanied by extra fees and charges.
Understanding Guaranteed Lifetime Withdrawal Benefits (GLWBs)
An annuity is a contract between the annuitant (the purchaser) and the issuer, where the annuitant makes a one-time or regular payments to the issuer. In return, the issuer provides regular payments back to the annuitant for life or a specified number of years.
When you opt for a fixed annuity, the issuer ensures a fixed interest rate on your contributions. Conversely, with a variable annuity, you can invest in the market through subaccounts, offering higher growth potential but also exposing you to market losses. A GLWB rider aims to mitigate this risk.
The GLWB rider guarantees a minimum lifetime payment, counteracting any losses in the subaccounts. Most issuers allow additional withdrawals from the cash value, though these generally reduce the guaranteed withdrawal amount.
How GLWB Riders Work
Variable annuities possess a cash value reflecting the premiums paid, adjusted for market gains or losses. A GLWB rider introduces a separate benefit base—or withdrawal base—used to calculate lifetime withdrawals.
Once you start receiving your income stream, this benefit base helps to determine your minimum guaranteed withdrawal. Specific percentages, determined by your contract and age, are applied to the benefit base to calculate the guaranteed annual payment. Age at the beginning of annuitization usually determines this rate.
Example
If you are 65 at your first withdrawal, your contract might stipulate a 5% withdrawal rate. Should you wait until age 70, the rate might be higher, say 5.25%.
Notably, the withdrawal amount is calculated based on the higher between the benefit base and the cash value at the start of guaranteed payout. Suppose you invested $50,000 in premiums, with a 5% withdrawal rate, but due to market performance, your cash value is only $35,000 at annuitization. The issuer would use the higher benefit base of $50,000 to calculate guaranteed minimum withdrawals, equating to $2,500 annually ($50,000 × 0.05).
GLWB riders might permit additional withdrawals, even during annuitization. However, such actions typically reduce the benefit base and thus the guaranteed withdrawals correspondingly.
Additional Withdrawals Example
Withdrawing 20% of your cash value reduces your guaranteed minimum payments by 20%. From our prior example, this leads to new payments of $2,000 annually ($40,000 × 0.05 after adjusting for a 20% withdrawal).
Insurance companies charge an annual fee for shouldering the market risk typically borne by you. These costs can vary significantly, so it’s crucial to review annuity documents carefully.
Potential GLWB Features
Some GLWB riders include additional features aimed at potentially increasing your guaranteed withdrawal amount, often for an extra fee. These might include:
Minimum Rate of Return
Your benefit base may be guaranteed a minimum rate of return by the insurer, ensuring that the higher of the updated benefit base or the cash value will be used to calculate withdrawals.
Example
Paying $50,000 in premiums with a guaranteed 4% return means that after two years, with a benefit base growing to $54,080, you can calculate lifetime payments from this increased amount, yielding $2,704 annually ($54,080 × 0.05).
Step-Up Feature
A step-up feature periodically compares the current cash value with the original benefit base used to calculate your GLWB. Should your cash value surpass the initial value, future benefits adjust to the higher cash value.
Example
With an initial $50,000 benefit base and 5% withdrawal rate equating to $2,500 annually but a future cash balance of $60,000, the withdrawal rate would revise to $3,000 annually ($60,000 × 0.05).
Pros and Cons of a GLWB
Pros
- A GLWB rider protects against dips in lifetime payouts due to market declines.
- Offers access to cash value throughout the annuitization phase, unlike traditional annuities.
Cons
- Associated costs add to the overall expense of protection.
- Investors with a long time horizon may not need the protection and might find the additional fees burdensome.
FAQs
What is a GLWB?
A guaranteed lifetime withdrawal benefit (GLWB) rider can be added to variable annuity contracts to guarantee a minimum payout level, countering market dips in your annuity’s cash value.
What are the downsides of a GLWB?
Costs are a prominent drawback; therefore, understanding all associated expenses through careful review of annuity documents is crucial.
What is the step-up feature on a GLWB?
The step-up feature recalculates the guaranteed benefit based on the higher of the initial benefit base or the present cash value, enhancing future guaranteed benefits if the account grows.
Related Terms: variable annuity, annuitization, cash value, fixed annuity, step-up feature, minimum rate of return
References
- Guardian Investment & Accounting, via Broadridge Advisor Solutions. “Guaranteed Lifetime Withdrawal Benefit Annuity Rider”.
