What is an Account Value?
The starting account value is the amount you use to purchase a variable annuity. Each year, your account value may grow or decrease, depending on the return of your sub-accounts, minus fees and charges. Variable annuities come with a host of optional features that you can select for an additional annual fee. One common type of variable annuity feature is the guaranteed account value benefit, also known as a GAV. The GAV option added to a variable annuity a) guarantees your initial premium amount as a lump sum regardless of market performance; b) allows your account value to appreciate with market upside; and c) allows you to withdraw 100% of your account value at the end of a certain time period.
What’s A Guaranteed Account Value Benefit?
Variable annuities come with a host of optional features that you can select for an additional annual fee. One common type of variable annuity feature is the guaranteed account value benefit, also known as a GAV.
The GAV option added to a variable annuity a) guarantees your initial investment as a lump sum regardless of market performance; b) allows your account value to appreciate with market upside; and c) allows you to withdraw 100% of your account value at the end of a certain time period.
Annuity FYI believes that there are very few cases where a GAV rider is a good recommendation. However, GAVs can be appropriate in some specific circumstances, such as investors who know they will need access to their money in 5-10 years, want to benefit from market upside, but want to ensure that their investment does not lose money — for example, an investor who is investing for a child’s future college tuition, or to purchase a home.
All GAVs protect your initial premium. Some also allow you to lock in gains on a quarterly or annual contract anniversary. The two examples below illustrate how this can work.
Hypothetical Example 1
John has two children, ages 10 and 11, and knows that in a few years he will need to start paying for their college education. He has $100,000 to invest now, but is concerned that putting it in the stock market, or even in a mutual fund, exposes him to loss of principal. He wants to make sure that in 10 years when he needs access to the money, he has not only his principal, but can benefit from stock market gains. He purchases a variable annuity with a GAV rider that guarantees his principal, and allows him to withdraw his investment in 10 years (10-year surrender period). At the end of the 10-year period the stock market has declined significantly, and his account value has sunk to $80,000. Because of the GAV, John can withdraw in a lump sum the entire $100,000 — his entire principal was secured, despite the decline in the stock market. On the other hand, if after 10 years his account value grew to $200,000, he would withdraw in a lump sum the $200,000, fully benefitting from market gains.
Hypothetical Example 2
Some GAVs allow you to lock in gains every quarter or year. Using the same scenario above, John invests in a variable annuity with a GAV rider that locks in gains every year.
In the first four years, John’s $100,000 has appreciated substantially to $135,000. Now suppose that over the next six years the market declines, and his account value sinks to $105,000 by year 10. At that time he would withdraw in a lump sum $135,000 — the highest annual contract anniversary value.
Fees for GAV riders vary, but generally cost 0.20% – 0.40% per year.
A GAV rider can be an excellent alternative to a fixed-indexed annuity. Compared with equity-indexed annuities, GAVs can often provide better diversification, dividends, principal protection, and ability to withdraw funds in a lump sum, all without the caps and spreads common to equity-indexed annuities.
