Variable annuities come with a host of optional features that you can select for an additional annual fee. One common and very popular type of variable annuity feature is the guaranteed minimum income benefit, also known as a GMIB. The GMIB is exactly what the name implies — a guaranteed minimum level of annuity payments by the insurance company, regardless of the performance of your annuity.
For example: suppose you were to invest $250,000 in an annuity with a GMIB that guarantees the greater of a) the actual value, b) 6% interest compounded annually, or c) the highest contract anniversary value of the annuity. Ten years later, due to poor market performance, the actual value of the annuity is worth only $296,747 (the same value had you invested in a mutual fund with the same net performance, after all fees are deducted). In this example with both the annuity and the mutual fund you have access to the $296,747 in a lump sum. But with the GMIB provision of the annuity you have the additional option of being able to “annuitize” $447,712 ($250,000 compounded annually for ten years at 6%) by taking a stream of income payments suited to your needs (see “payout options,” explained below). Since one of the biggest fears of retirees is outliving their income, many investors find that the GMIB and the lifetime stream of income brings them tremendous peace of mind, and is a reason why many investors prefer this type of variable annuity to standard mutual funds.
Not every insurance company offers GMIBs, but those that do generally allow GMIBs to be added to most, if not all, of their variable annuity products. Note that GMIB provisions go by different names, depending on the insurance company that provides them: “GRIP,” “GIA,” “RIG,” “MAP,” and “Income Guard” are all examples of names of GMI B features giving by insurance companies. Don’t be confused, they all refer to the same sort of GMIB feature. In fact, you can typically add a GMIB provision to any of the four primary variable annuity contracts: the standard-type annuity (no bonus, 7-year decreasing surrender period); the bonus annuity (typically a 3-6% up-front bonus and a 9-year average surrender period); the no-surrender charge annuity (no fee to get in, no fee to get out); and the L-Share (a 3-4 year surrender period with no bonus).
GMIB provisions are typically exercisable after the 10th year and require that you annuitize the entire contract (some contracts allow you to exercise your GMIB provision sooner, others allow for partial annuitizations). There are a multitude of payout options from which to choose, such as payments for a certain period of time (typically five to twenty years — “period certain”), payments for the rest of your life or your spouse’s life, or any combination of the two. You can even choose between a fixed payment that doesn’t vary or a variable payment that is based on market performance. There is at least one product that allows you to annuitize on a variable basis and receive market upside, while guaranteeing a minimum payment regardless of market performance. This is particularly attractive to investors concerned that their payments keep up with inflation.
Compare Guaranteed Minimum Income Benefit riders in AnnuityFYI.com’s easy to read table.
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