How VAs can deliver much needed income solutions
by Eric HendersonMr. Henderson is Senior Vice President of Life Insurance and Annuities with Nationwide. Visit www.nationwide.com
Guaranteed Lifetime Withdrawal Benefits (GLWBs) can be a useful tool by helping clients find ways to create sources of income in retirement. As you consider utilizing GLWBs in your client’s portfolio, it imperative that you stay informed of new options and riders that are made available by insurance providers. When determining which solution might be the best fit for your client, here are considerations when evaluating GLWBs:
1. What is guaranteed accumulation for income?
Most widely known as the “roll-up,” the majority of GLWBs in the industry have some sort of guaranteed growth for future income valuation. The roll-up is a feature that provides a guaranteed increase to the income benefit base, which is the value that income payments will be based on. Some insurance providers offer a higher roll-up than others on their contracts, while others may not offer one at all. Some are based on compounding interest while others are simple interest. This is one of the more important features on the contract and should be examined closely.
2. What are the lifetime withdrawal percentages available for the client?
Since these benefits are intended to create income for retirement, the actual cash flow the rider provides is arguably the most important feature to consider. Like the roll-up, some insurance carriers offer higher payouts than others. Lifetime withdrawal benefits can guarantee income for one client or jointly for spouses at a lower percentage. Multiplying the withdrawal percentages included with the annuity by the guaranteed accumulation will determine the amount of guaranteed lifetime income a client can receive, which, depending on a client’s needs or situation, could be the most important factor overall when considering variable annuities with withdrawal benefits.
3. What happens if the client requests early withdrawals?
Not all riders will allow the client to take a withdrawal with no adverse consequences. Often the first withdrawal will stop the roll-up/guaranteed accumulation. Some contracts do allow a one-time withdrawal without this consequence, but upon the next withdrawal it would stop roll-up or guaranteed accumulation. Other contracts do allow for withdrawals prior to using the income rider, but the client does not receive the roll-up or guaranteed accumulation in the contract year the withdrawal occurred.
4. How does market performance impact the need for GLWB?
Some annuities have stronger guarantees in bad markets, but may then have less of a guarantee in a very good market, while other annuities focus on better guarantees in good markets and do not have as strong of guarantees in bad markets. It is important to understand that most consumers buy the guarantee because they need the protection in down markets, not because they want a stronger guarantee when they need it least. Solving for the true consumer need is critical, rather than chasing after something that looks nice, but is less needed.
5. How can a GLWB be used with other products?
While both single-premium immediate annuities (SPIA) and GLWBs guarantee income streams, SPIAs have higher payouts but no upside. GLWBs have somewhat lower payouts but upside potential. Combining the two may make sense in certain situations, depending on the guaranteed income level you are solving for a client.
Let’s look at a hypothetical situation for a client who is 70 years old and retired, will begin taking income and needs $40,000 per year to maintain his lifestyle in retirement. If possible, he’d like to increase his income throughout the remainder of his retirement.
Initial asset amount: $1 million
- $500,000 placed in a Single Life with 10-Year Term Certain immediate annuity
- $500,000 invested in a variable annuity with a GLWB
7.46%2 income as a percentage of premium from the immediate annuity
5.60%3 for the variable annuity with a GLWB
Annual income: $65,300
$37,300 from the immediate annuity4
$28,0003 from the variable annuity with a GLWB
Using this approach, a client is provided with guaranteed lifetime income and may have the opportunity for his or her income to increase when the income benefit base on the variable annuity with a GLWB is re-evaluated on the contract anniversary. Also, depending on the issuing company, the client could also have access to the money in his or her fixed SPIA contract with a liquidity feature in the case of an emergency. Generally, future scheduled income payments will be reduced for a period after a liquidity withdrawal is taken.
Variable annuity with life guaranteed lifetime withdrawal benefit1
- Initial investment amount: $1 million
- Withdrawal rate: 5.60%3
- Annual income: $56,0003 (calculated as a percentage of the annual income benefit base, the numerical value used to determine how much your lifetime withdrawals will be)
The guaranteed lifetime withdrawal benefit (a type of living benefit, available at an additional cost, that provides a guaranteed lifetime withdrawal based on a fixed percentage) will provide a client with income for the rest of his life, subject to the claims-paying ability of the issuing company. The income could potentially increase through an annual step-up feature that locks in the income benefit base at the greater of the contract value or income benefit base. And depending on the specific GLWB, there may be additional features that create more income potential for a client. Please keep in mind that excess withdrawals could reduce or terminate the income benefit base; certain restrictions and limitations may apply.
The split-allocation approach that uses a fixed single-premium immediate annuity (SPIA) with a variable annuity with a guaranteed lifetime withdrawal benefit would increase a client’s retirement income potential by nearly $10,0005 more than for a client who only used the GLWB.
Guaranteed Lifetime Withdrawal Benefits on variable annuities can play a key role in a portfolio to help clients receive protected monthly income in retirement. As carriers continue to introduce new features to their offerings, keep these questions in mind as you consider which GLWB could best help your client as they prepare for and live in a financially secure retirement. ◊
1 These hypothetical examples are for illustrative purposes only and are not an indication of actual or future results. The illustrations are based on a 70-year-old male and assume annual payments. Examples do not reflect the performance of any investment. They do reflect the assumed net rate of return to include mortality and expense fees, administrative fees, contract fees and the expense of the underlying investment options. The average fee for similar moderate allocation mutual funds is 1.32%. Maximum fees for variable annuities range from 0.40% to 1.85%. The maximum fees for living benefit riders available on variable annuities range from 0.80% to 1.50%.
2 The income as percentage of premium is equal to the income payment amount for the year divided by the premium. While this demonstrates your income payments for each year as a percentage of your premium, it is neither an actual rate of return on your premium nor the percentage used to calculate your income payment amount. It is for illustrative purposes only.
3 This example is based on payout rates for a 70-year-old male, an income benefit base of $500,000 and a 5.60% withdrawal rate. Rates are subject to change.
4 The contract is calculated based on rates for a 70-year-old male with a Single Life with 10-Year Term Certain contract. This value assumes monthly payments times 12 months. Rates are subject to change.
5 Based on hypothetical examples used above.