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Detailed Explanation of GLWB’s in a Variable Annuity


While Mike Henkel’s article for Advisor One is aimed at advisors and what they need to know about variable annuities, it gives an easy to follow explanation that investors can benefit from as well.  His series: “What Advisors Don’t Know About Variable Annuities” is informative and I learned a lot from the latest installment, “How GLWBs Work.”  Once you purchase a variable annuity with a GLWB, your underlying account value grows yearly depending on how the investment portfolio performs.  Any withdrawals and fees are taken into account before any portfolio growth is figured.  Your highest account value will be the high water mark for your variable annuity ongoing.

That high water mark is multiplied by your pre-determined withdrawal percentage to figure out your withdrawal amount.  A common percentage is 5%, but the article gives examples of 8% and 9% as well for the purpose of comparison.  Your new actual account value is figured out by taking the withdrawal amount and the amount of fees you pay yearly out then adding in any returns on your underlying portfolio.  The high water mark will stay the same unless your new actual account value is higher than the old high water mark.  If your new actual account value is higher, then it will become your new high water mark.  This process continues until your account value goes down to zero, unless you die before that.  If you die, your heirs will get any remaining balance as a death benefit.  If your balance goes to zero, the insurance company will make your payments throughout the remainder of the contract.

Mr. Henkel added some excellent graphs in his article to show the changes in the account value, the actual account value, and the high water mark over a ten year period.  His examples were for a $100,000 annuity with a 5% return and 3% paid in fees.  After ten years, the actual account value is significantly lower than the high water mark when calculating for a 5% return.  Using the example with an 8% portfolio return, those values are much closer together.  The graphs show that there will not be an increase in your payments if you have 5% returns, but your payments will remain constant.  Even with an 8% return, your payments do not increase.

In order to receive an increase in payments, you need a return that is higher than your guaranteed withdrawal rate and fees added together.  If you are using your variable annuity to try and combat an inflation rate of 2.5%, you’ll have to average an 11% return to get those increases.  An important piece of advice to take from this article is that your fees are often based on the high water mark rather than your actual account value.  Make sure that you look for this stipulation in your annuity information.  But keep in mind that annuities typically are not meant for getting the best returns; they are beneficial for the guaranteed income they offer you for the rest of your life.  And in the case of variable annuities with death benefits, your heirs will get money as well.  This is a great summary of some details related to GLWBs, so hopefully you learned something you didn’t already know.


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