What is a GLWB?
A guaranteed lifetime withdrawal benefit (GLWB) is a variable annuity rider that guarantees a minimum payout even if market losses lower your contract’s cash value. Most riders allow cash-value withdrawals. Annual costs vary per issuer for the GLWB rider.
With a fixed annuity, the issuer pays a fixed interest rate on your money. However, variable annuities allow market investing via subaccounts. That provides higher growth potential but also potential losses. A GLWB reduces risk.
GLWB rider guarantees a minimum lifetime payout that counteracts any subaccount losses. Most issuers allow for additional withdrawals from the cash value, although these usually lower the guaranteed withdrawal amount.
Variable annuities’ cash value equals premiums paid plus (or minus) market returns. With a GLWB rider, the contract has a separate benefit basis (“withdrawal base”), which is used to compute lifetime withdrawals.
Once you start receiving your income stream, this benefit base determines your minimum guaranteed withdrawal. Depending on the contract’s terms and your age, a percentage of the benefit base determines your guaranteed yearly payout. Usually, it’s determined by your age at the time. For example, if you’re 65 at the time of your first withdrawal, your contract may establish a 5% withdrawal rate, while if you start getting payments at 70, that rate may be higher, say 5.25%.
An essential feature of GLWB riders is that the withdrawal amount is based on the benefit base or cash value, whichever is greater when you start getting guaranteed payments.
Say you invested $50,000 in premiums and had a 5% withdrawal rate, but owing to poor market performance, your cash value is only $35,000. Your issuer will take the higher of the two amounts, in this case, your benefit base of $50,000, to calculate guaranteed minimum withdrawals. ($50,000 x 5% withdrawal rate) = $2,500 per year.
GLWB riders may also allow additional cash withdrawals, even during annuitization. However, that’ll usually reduce your benefit base. A 20% cash value withdrawal would reduce your guaranteed minimum payments by 20% for the rest of your life. In the preceding example, such withdrawal would reduce GLWB payment to $2,000 ($40,000 x 5% withdrawal rate).
Most insurance firms charge an annual fee for taking on the market risk that the client would otherwise bear. Those costs vary significantly, so read annuity contracts carefully before buying one.
Some GLWB riders have extra benefits that can potentially increase your guaranteed withdrawal amount. The issuer may add a fee or include it in the rider cost. Examples include:
The minimum rate of return
The insurer may guarantee a minimum rate of return for your benefit base. The higher amount of your benefit base (plus a minimum return) or your cash value is what determines the withdrawal amount. For example, suppose you paid $50,000 in premiums for a guaranteed 4% return, irrespective of market conditions. In two years, that base would be $54,080 ($2,000 after the first year, $2,080 after the second).
If the cash value stayed at $50,000, the issuer would compute lifetime payments using the benefit base. For instance, with a 5% withdrawal rate, you’d get $2,704 per year ($54,080 x 5%).
If the rider includes a step-up feature, the insurer will compare the current cash value to the amount initially used to compute GLWB. If the cash balance is higher, it’ll adjust the benefit accordingly.
Consider an original withdrawal amount based on a $50,000 benefit base and a 5% withdrawal rate. That means the original guaranteed withdrawal was $2,500. But, if the cash balance five years later is $60,000, the 5% withdrawal rate would be applied to that amount. So, you’d get $3,000 annually ($60,000 x 5% withdrawal rate).
GLWB pros and cons
The main benefit is that the GLWB rider protects you from a lower lifetime payment if the market drops. The rider also allows you to access your cash value if needed, which you can’t do with a standard annuity, which holds up your money after annuitization begins.
Of course, the downside is the extra cost of buying this protection. The yearly fee can range from 0.1% to more than 1.0% of the contract’s cash value. Those who start paying into an annuity long before they annuitize have less exposure to market risk since the stocks and bonds in their subaccounts have more time to recover. Thus, clients with a longer time horizon might want to avoid the additional fee of the GLWB rider.
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Carl Wyllie is an advisor focused in areas of Medicare, retirement, estate planning, and crisis planning. Carl works with individuals of all ages in planning for their retirement. He is uniquely effective in building working relationships between their families and elder care law attorneys to assist them in avoiding a healthcare crisis. Carl is particularly sensitive to helping provide the means for his clients to maintain their independence and dignity when a change in their health occurs due to the natural aging process.