Some annuities offer options riders for additional cost, known as guaranteed living benefits, which protect the insured’s income from the effects of a market decline, or help address concerns about outliving savings. Many contracts in the marketplace today offer living benefits.
One popular type of living benefit is a guaranteed lifetime withdrawal benefit (GLWB), which protects the insured’s income stream by providing a guaranteed floor of income, regardless of the actual underlying contract value, subject to the claims-paying ability of the issuing insurer. Under the terms of this type of rider, the insured is generally allowed to withdraw a specified percentage of a guaranteed benefit base each year for the insured’s life, or for the insured’s and their spouses’s life in the event of a joint life rider, even if the actual account value decreases to zero due to the annual guaranteed withdrawal or market declines. The benefit base is set to the contract value typically at the time the rider is purchased and is generally reset at varying intervals, usually each year, based on the performance of the underlying portfolios.
Most GLWBs lock in the income base at the highest value on each contract or rider anniversary. Some of these riders also include guaranteed minimum rate, which sets the income base to the higher of the highest contract anniversary value or the total purchase payments credited with a rate of interest (such as 5%). The income base is not the same as the account value and is not available for withdrawal like a cash value. The actual account value will decrease with each withdrawal, though payments under the terms of the rider will still continue for life. There will generally be no funds available for beneficiaries if withdrawal taken prior to death exceed the actual contract vale. Withdrawals in excess of the specified annual payout amount will generally reduce the future income on a permanent basis.
The guarantees provided by a GLWB rider can provide the insured confidence that they will have guaranteed income for life, no matter how long they live or what direction the market takes. It is important to understand the restrictions and fees. Guarantees are subject to the claims-paying ability and financial health of the insurance company.