| Living Benefit Riders | Guaranteed Minimum Withdrawal Benefit
Guaranteed Minimum Withdrawal Benefits (GMWBs) are designed for investors who need monthly, quarterly, or annual income from their investment, and want a guarantee* that they will never lose their principal, regardless of market performance.
When a variable annuity is purchased with a GMWB rider, the insurance company guarantees that even if the market performs poorly, you will not lose the money that you have invested. Furthermore, over the lifetime of your contract, you can withdraw an amount equal to your total principal, usually in monthly, quarterly, or annual withdrawals. Depending on the insurance company issuing the annuity, you can typically withdraw from 5% to 10% per year.
The examples below each assume a $250,000 investment in a variable annuity with a 7% GMWB rider.
Bear Market Example
This example assumes the market performs poorly during the accumulation period of your investment. We will assume that you invested $250,000 in a variable annuity, and purchased a 7% GMWB. We will also assume that because of poor market performance your account declines each and every year. Because of poor market performance, we will assume that your account value went down to zero by the 10th year, when you wanted to begin taking withdrawals. Because of the GMWB, you will still receive $17,500 per year until you have received back your original investment of $250,000, which will take 14.2 years, regardless of the fact that the account value has declined to zero.
Bull Market Example
This example assumes the market performs very well. Some insurance companies allow you to "step-up" the guarantee from your initial principal to an amount to which it has grown. We will assume you invested $250,000 in a variable annuity, and purchased a 7% GMWB and began taking withdrawals at 7% immediately. You would receive $17,500 every year. Now suppose that because of positive market performance your account increases 20% per year. By the end of the 5th year, your account is worth $465,806 (even though you have been withdrawing $17,500 per year). At this time you can exercise the step-up provision. As a result of the step-up, your withdrawal benefit is now calculated at 7% of $465,806, which would increase your annual withdrawals to over $32,600! You also continue to have the peace of mind that if the market declines, the "locked in" value of $465,806 would now be protected. And if the market improves further, your account value may go up even more, and you could also potentially lock in these additional gains in the future.
What to look for when purchasing a Guaranteed Minimum Withdrawal Benefit rider
Maximum Withdrawal Amount: Make sure that the GMWB ’s maximum withdrawal amount is consistent with your income needs. Most GMWBs allow you to withdraw between 5% and 7% annually, although a few allow higher percentages.
Step-Up: As mentioned in the Bull Market Example above, a step-up can be an important feature of an GMWB when your account value increases. Be certain the GMWB that you purchase contains a step-up provision. Most companies provide for a step-up every three to five years, but a few allow for annual step-ups.
Step-Up Window: Check the step-up window. Some insurance companies allow you to step-up anytime after three to five years. This gives you maximum flexibility to time the step-up with market performance. Others give you a 30-day window to initiate the step-up after three to five years—a far less flexible option.
Fees: Fees for the GMWBs range from 0.25% to 1.00% annually. However, a lower fee does not always mean a better GMWB. It is more important that the GMWB's benefits fit your individual needs. In addition to the GMWB fee, also consider the step-up provision, maximum withdrawal percentage, as well as other fees associated with the annuity, such as M&E and sub-account expenses.
* Guarantees are based on the claims-paying ability of the issuing company or companies
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