| Living Benefit Riders | Guaranteed Minimum Income Benefit
Guaranteed Minimum Income Benefit (GMIB) is a rider on a variable annuity contract that provides a guaranteed* minimum level of annuity payments by the insurance company, regardless of the performance of the sub-accounts of the variable annuity.
An Example:
$200,000 invested in a variable annuity with a GMIB rider that guarantees the greater of:
a) the actual value
b) 6% interest compounded annually, or
c) the highest contract anniversary value of the annuity.
Case #1
Ten years later, due to poor market performance, the actual value of the variable annuity is worth only $243,799, which you can access as a lump sum. But with the GMIB provision of the variable annuity, you have the additional option of being able to annuitize $358,170 ($200,000 compounded annually for ten years at 6%) by taking a stream of income payments suited to your needs. Many investors find that the GMIB and the lifetime stream of income payments brings them peace of mind, and is a reason why many investors prefer to have a variable annuity with a GMIB rider.
Case #2
The market has been up and down several times over the ten years since you purchased the variable annuity. Its current value is $415,319, but it had a high value of $505,993 at the end of the seventh year. Since the GMIB guarantees the greater of:
a) the actual value ($415,319)
b) 6% interest compounded annually ($358,170), or
c) the highest contract anniversary value ($505,993)
the annuitization will be based on: c) the highest contract anniversary value ($505,993).
Not all insurance companies offer GMIBs, but those that do generally allow GMIBs to be added at time of original purchase to most, if not all, of their variable annuity contracts. You can usually add a GMIB provision to any of the four primary types of variable annuities:
· a standard annuity (no bonus with a 5-7 year decreasing surrender period)
· a bonus annuity (3%-6% up-front bonus with a 7-10 year decreasing surrender period)
· a no-surrender charge annuity (no fee to get in or out)
· a short-term surrender charge annuity (3-4 year surrender period with no bonus)
Most GMIB riders can be exercised after the 10th year and require that you annuitize the entire contract (some contracts allow you to exercise the GMIB provision sooner; others allow for partial annuitizations). There are a multitude of payout options from which to choose, such as payments for a certain period of time (usually 5-20 years), payments for the rest of your life or your spouse’s life, or any combination of the two. You can even choose between a fixed payment that doesn’t vary or a variable payment that is based on market performance. There are a few companies that allow you to annuitize on a variable basis and benefit from market increases, while being guaranteed a minimum payment regardless of market performance. This is particularly attractive to investors who want to be sure that their payments will keep up with inflation.
* Guarantees are based on the claims-paying ability of the issuing company or companies.
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