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The Best Little Known Benefit Out There


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The so-called “rollup” might be the single best reason to buy a variable annuity contract with a guaranteed lifetime withdrawal benefit. Also known as a “deferral bonus,” the rollup automatically raises the “income base” (aka “benefit base;” the number used to calculate your guaranteed annual income) by a certain percentage for each year that you don’t withdraw money from the contract.

For instance, if Ms. Smith puts $100,000 into a variable annuity contract, the initial benefit base is $100,000. For every year that she doesn’t take a withdrawal, the benefit base might grow by, for example, 5% or 6% (compounded annually) or even 10% (simple growth). In some policies, the benefit base is guaranteed to be at least double the original premium if the owner withdraws nothing from the contract for 10 years after purchase.

But, in practice, two strange things occur after such contracts are purchased. First, many people seem to believe that the rollup in the benefit base is the same as the appreciation of the account value. It is not. The account value is the actual market value of the mutual funds where the owner put her original $100,000.  In other words, the cash value of the contract. It might be larger, or smaller, or the same as the benefit base. But the rollup has no effect on the account value.

Second, a recent study by Milliman, a global actuarial consulting firm, showed no sign that retired purchasers of variable annuities with GLWBs and rollups use the rollup feature at all. Many of them buy the variable annuity and simply withdraw an annual income of 5% or 6% of the benefit base within a year or two. Milliman’s experts aren’t sure what this means. They suspect that the financial advisors like the rollups, and recommend annuities with rollups to their clients. But the actuaries see little or no indication that the clients use the rollups to full advantage.

The moral: If you buy a variable annuity with a rollup, get acquainted with it and consider using it by delaying your withdrawals.  That might be inconvenient if you buy the annuity at age 65, so consider buying it when you’re 55 years old and taking income when you’re 65. That will require foresight. But time, after all, is money. If you don’t care about the rollup, don’t buy that option. You might end up paying an annual fee for something that you never use.

Written by Kerry Pechter

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