Withdrawal Benefit Provision

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Annuity FYI Overview

Variable annuities come with a host of optional features that you can select for an additional annual fee. One increasingly popular type of variable annuity feature is the withdrawal benefit provision, also known as a GMWB (Guaranteed Minimum Withdrawal Benefit). 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.

If you purchase a GMWB Rider with your variable annuity, 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, typically in monthly, quarterly, or annual withdrawals. Depending on the insurance company issuing the annuity, you can typically withdraw from 5% to 10% per year.

Let’s look at some examples to understand how it works.

Examples

Example #1

Let’s start with a rare but instructive case, in which the market is flat for the duration of your investment. Suppose you invest $100,000 in a variable annuity, and purchase the GMWB with a 7% withdrawal maximum. Also suppose that over the next 15 years, the market is completely flat -- your account values neither increases or decreases in value. Every year you receive $7,000 (paid annually, quarterly, or monthly, whichever you prefer). After year one your account value is $93,000, after year 2 $86,000, etc. This payment would continue until the company has paid you back an amount equal to your principal. Once this happens, their obligation is fulfilled, and the contract is then over.

Example #2

Now let’s take a case where the market performs poorly during the course of your investment. Suppose you invest $100,000 in a variable annuity, and purchase the 7% GMWB. Now suppose that because of poor market performance your account declines 10% per year. Because of withdrawals and market performance, your account value would be zero in the 10th year. But because of the GMWB, you will still receive $7,000 per year for all 14 years (14.2 years, to be exact) -- regardless of the fact that the account value has declined.

Example #3

Some insurance companies allow you to "step-up" the guarantee from your initial principal to an amount to which it has grown. So let’s take a case where the market performs positively during the course of your investment. Suppose you invest $100,000 in a variable annuity, and purchase the 7% GMWB. You receive $7,000 every year. Now suppose that because of positive market performance your account increases 20% per year. By the end of year 5, your account is worth $186,000 (even though you’ve been withdrawing $7,000 per year). At this time you instruct the insurance company to initiate a step-up. As a result of the step-up, your withdrawal benefit is now calculated as 7% of $186,000, so your annual withdrawals increase to over $13,000! Plus, you continue to have the peace of mind that if the market declines, the value of $186,000 that you "locked in" would now be protected. And if the market improves, your account value may go up even more, and you could potentially lock in these gains as well in the future.

Why Purchase a GMWB Instead of a Lifetime Income Benefit (LIB)?

Some GMWBs have very high annual withdrawal amounts -- up to 12% in some cases -- whereas the highest lifetime income benefit offers no more than 7%. In other words, a GMWB is noting more or less than a 100% return of your premium over a minimum of 8.33 years to typically 20 years in a flat or down market.

Considerations in Purchasing a GMWB 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 some offer as high as a 12% withdrawal.

Step-Up: As discussed in Example #3 above, a step-up is an important feature of a GMWB when your account value increases. Make sure it is a feature of the GMWB that you purchase. Typically you can initiate a step-up every three to five years, depending on the insurance company.

Step-Up Window: For GMWBs with step-ups, check the step-up window. Some insurance companies allow you to step-up any time after three or five years. This gives you maximum flexibility to time the step-up with market performance. Others give you a 30-day window to step-up after three or five years, a far less flexible option.

Fees: Fees for the GMWB range from 0.25% to 1.00% annually. That said, a lower fee does not always mean a better GMWB -- consider the GMWB fee as well as the step-up, step-up window, maximum withdrawal percentage, as well as other fees associated with the annuity, such as M&E and sub-account expenses.

Annuities are offered by prospectus only which detail all fees and charges, and may be obtained upon request from AnnuityFYI. Read carefully before investing or sending money. Please see the prospectus for restrictions and limitations. Some annuities, riders, features and investment options may not be available in all states. Withdrawals may be subject to income tax, and if made prior to age 59 1/2 a 10% federal penalty tax. The contracts contain limitations and the policy forms may vary by state. Variable annuities are long-term investment products d esigned for retirement purposes.