| Living Benefit Riders | Lifetime Income Benefit
A Lifetime Income Benefit (LIB) rider attached to a variable annuity provides a guarantee* by the insurance company of a regular monthly, quarterly, or annual payment for your lifetime, even if your account balance is reduced to zero.
If you invested $200,000 in an annuity with a 5 percent lifetime income benefit rider, the insurance company will guarantee that you can withdraw $10,000 per year for the rest of your life, regardless of how little is in your account. If your account balance were to be drawn down to zero, the insurance company would continue to pay you until you die. LIBs guarantee that you will never outlive your annuity account. LIBs are especially well-suited for investors who plan on a lengthy retirement and want the piece of mind of regular, guaranteed income.
LIBs also allow you to base the withdrawal percentage on some minimum compounded growth rate, usually 5%-7%. If your account value appreciates, many variable annuity contracts have the option of locking in the increased account value on a contract anniversary, which is also known as “stepping up” the amount on which the withdrawal percentage is based. This permits you to participate in higher risk equity sub-accounts while providing the protection of a minimum growth rate.
The three examples below each assume a $250,000 investment in a variable annuity with a LIB that has a guaranteed minimum growth rate of 5%, regardless of market performance.
Bear Market Example
This example assumes the market performs poorly. Ten years after you purchased an annuity with the LIB, you retire and start taking withdrawals. Since the market had declined significantly, your account value had been reduced to $195,000. However, because of the 5% guaranteed minimum growth rate, you can base your withdrawals on $407,224. At a 6% annual withdrawal rate, this would give you more than $24,400 per year for the rest of your life, regardless of how the market performs in the future.
Bull Market Example
This example assumes the market performs well. Ten years after you purchased an annuity with the LIB, you retire and start taking withdrawals. Your account value has grown to $475,000, far greater than the 5% guaranteed minimum growth rate of $407,224. At this time you could start taking withdrawals, and at a 6% annual withdrawal rate, the $475,000 would provide $28,500 per year for the rest of your life, regardless of future market performance.
Fluctuating Market Example
This example assumes the market performs well for seven years and then poorly for the next three years. Your account value had grown to $495,000 at the end of seven years, but by year ten your account value had gone down to $325,000. Instead of basing your withdrawals on the 5% guaranteed minimum growth rate of $407,224, some insurance companies allow you to lock-in or "step-up" the guarantee to the highest amount to which it has grown. In this case, at year ten you could “step-up” the account value to its ten-year high of $495,000, and based on a 6% annual withdrawal rate, you could take $29,700 annually for the rest of your life, regardless of market performance in the future.
What to look for when purchasing a Lifetime Income Benefit rider
Guaranteed Minimum Growth Rate: LIBs generally allow you to base the withdrawal percentage on some minimum compounded growth rate (such as 5%).
Maximum Withdrawal Amount: Make sure that the LIB’s maximum withdrawal amount is consistent with your income needs. Most LIBs allow you to withdraw between 5% and 7% annually, although a few offer higher percentages.
Step-Up: As mentioned in the Fluctuating Market Example above, a step-up can be an important feature of an LIB when your account value increases. Be certain the LIB that you purchase contains a step-up provision.
Fees: Fees for the LIBs range from 0.25% to 1.00% annually. However, a lower fee does not always mean a better LIB. It is more important that the LIB's benefits fit your individual needs. In addition to the LIB 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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