A primer on GLWBs, Pt. I
By Randy Timm
Over the past several months, a number of insurance carriers have made significant changes to their income riders or have pulled income riders from their annuity lineup altogether. In light of these changes, how prepared are you to continue providing income rider options to your clients?
In this section of my annuity notebook, I provide you with a primer on guaranteed lifetime withdrawal benefits (GLWBs). To give you an overview of GLWBs, I start with GLWB basics and share why they are likely to remain an important income option for many of your clients. I finish this section of the notebook by discussing the history and future of GLWBs.
A GLWB is a living benefit that guarantees lifetime income without requiring your client to annuitize. (Keep in mind, most riders can only be added when the policy is issued.) It allows the owner to remain in control of his or her money, while providing a guaranteed income floor. Most GLWBs offer accumulation rate roll-up guarantees, generally ranging from four percent to eight percent, and most provide the flexibility to start and stop withdrawals. Some GLWBs also provide a potential step-up benefit at the time of the first income payment, and some offer ratcheting income during the payout phase.
What can be confusing about a GLWB is the special "account" system that's used to track the basis for determining the amount of future income payments. Depending upon the carrier or annuity product, this special account system can be known by different names, such as: income account value, benefit base, guaranteed withdrawal base, withdrawal payment base, or income withdrawal value. The problem with using the term "account" is that a producer or customer could become confused, thinking the value of that special "account" is the same as the annuity's cash value, which it is not.
Perhaps a more accurate term is "income benefit base," because this clearly describes the main purpose of their special value. Regardless of what it's called, it's very important that you and your clients understand that the sole purpose of this value is to determine the amount of future income payments that your client can receive. It is not the same thing as the annuity's accumulated value, and it is not an account that can be cashed out.
The GLWB's income benefit base is:
- Normally guaranteed to grow at a specified rate, or formula, most commonly for 10 years or until withdrawals begin under the rider.
- The account used for a series of lifetime income or fixed period withdrawals.
- Usually the basis for the rider charge.
- Shown on the annual report.
- Increased automatically at the time of first withdrawal.
- A lump sum surrender account.
- A lump sum death benefit account.
- An annuitization account.
- Used for tracking withdrawal taxation or the underlying annuity guarantee.
As an insurance professional, it's imperative to stay compliant when you're selling GLWBs. To do this, it's important to receive ongoing training and to read all carrier bulletins regarding product changes and/or how to communicate about GLWB benefits. Using carrier-approved marketing materials when presenting GLWBs to your clients can also help you market them properly. However, if you choose to create your own GLWB marketing materials, make sure you submit them to the respective carrier(s) for compliance review.
Generally, it's not compliant to make GLWB claims such as:
- You can double your money in "x" amount of years.
- You can earn seven percent on your money.
- Your annuity can earn seven percent.
- You earn a 20 percent premium bonus.
- You can earn guaranteed 17+ percent on your money in the first year with a 10 percent bonus.
- The income benefit base is not the same as the accumulated value of the underlying contract.
- The sole purpose of the income benefit base is to determine the amount of future income payments you can receive from your contract.
- These riders may have a cost. (And disclose the cost.)
- The lump sum death benefit does not come from the income benefit base.
- Roll-up accumulation under the rider ceases when withdrawals begin under the benefit.
It wasn't until the Great Depression that interest in annuities began to grow. This was because insurance companies were viewed as a safe place to save money and still receive guaranteed lifetime payments.
Since then, longevity is one of the main reasons why the demand for living benefits has remained high. Everyone hopes for a long and secure retirement, but as the number of years lived in retirement increases, so does the risk of outliving retirement dollars. Do you remember the last time you sat down with a married couple who were 65 years old and they told you they thought they had a 25 percent chance that one of them would live to age 97? This probably hasn't happened, but these statistics are why guaranteed retirement income products are so appealing to many people. Take a look at Table 1 to get a better idea on projected life expectancies of people who purchase annuities.
Source Mortality 2000 Table
The history of GLWBs on fixed indexed annuities (FIAs)
Three companies introduced a GLWB during the second quarter of 2006 on a fixed indexed annuity (FIA). At one point, 25 carriers offered these riders on FIAs; currently 20 offer these riders on FIAs. GLWBs are also being offered on more traditional fixed annuities.
Industry sales statistics
Table 2, from LIMRA, demonstrates individual annuity sales from the last 10 years. First, take a look at the dark bar, which illustrates the substantial growth of variable annuities. This increase was due to the market and the tremendous popularity of living benefit riders. The lighter bar illustrates fixed and fixed indexed annuity sales. At periods where the stock market took a substantial drop -- such as 2002 and 2008 -- sales for fixed annuities rose.
It's clear that when the market decreased in the recent past, consumers reached out for the security of fixed annuities. The trend continued for the fourth quarter of 2008. And in the first half of 2009, fixed outsold variable annuities.
Below are statistics from LIMRA based on variable annuities in-force assets.
Variable Annuity Year End Assets
2007 $1.517 trillion
2008 $1.151 trillion
What happened to the $366 billion of consumers' values? The values decreased when the market decreased. In one year, they were down 24 percent. They decreased further at the end of the first quarter, but gained some in the second quarter of 2009. Remember, variable annuities in their purest form are a principal at risk product. On a positive note, many of these retirement balances were protected because the consumer had some form of living benefit on their variable annuity.
The future of GLWBs
Carriers are continuing to review the long-term costs and risks of these riders. Variable annuity players have already started down this road; many riders have been removed from sale or have been dramatically adjusted.
Fixed annuity carriers may consider the following on future issued policies:
- A lower roll-up rate and higher usage of the simple interest method.
- Product pricing levels to shorten the guarantee period and increase future charges.
- Lower payout percentages to encourage deferral of income.
- Limiting riders to certain products and/or building the riders into the product, offering them to everyone in order to spread costs and lower utilization.
- Pulling their riders altogether.
- Limiting new agent carrier contracting.
- Increasing GLWB rider's availability on traditional fixed annuities.
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