A primer on GLWBs, Pt. 2: Nine GLWB case studies
By Randy Timm
A guaranteed lifetime withdrawal benefit (GLWB) guarantees your client lifetime income without requiring your client to annuitize the contract and the Income Benefit Base is the basis that determines the amount of future income that would be available.
These spotlights are based on a hypothetical roll-up rate using compound interest of 7 percent on the Income Benefit Base. Throughout the article, specific products and/or riders will not be named. Before you present an annuity product and/or income annuity product rider to your client, you should always review carrier-approved marketing materials, state approvals, and any product variations for your state. This article is not intended to give tax or legal advice and is for general educational purposes only. Features and/or Riders may not be available in all states and may vary from state to state.
Spotlight No. 1: Nursing home confinement enhancement
Some income benefits offer a provision that pays an enhanced income benefit if the annuitant(s) are confined to a nursing home.
Suppose a husband and wife, both ages 80, have $500,000 in their income benefit base and now want to begin lifetime retirement income under the rider. The joint income for life would be $32,500 (6.5 percent payout factor). Two years later, the husband goes into a nursing home and the annual income increases to $65,000. Five years later, the husband dies and the income decreases to $32,500 for the surviving spouse. One year later, the wife goes into the nursing home and the income increases to $65,000. Any remaining accumulated value in the underlying annuity is left to the beneficiary. Usually no underwriting is required for this enhancement. Some producers call this a nursing home doubler benefit.
Spotlight No. 2: Increasing income benefit base during accumulation
Some income benefits increase the income benefit base during accumulation period at a higher rate than the roll-up rate in the contract. This can provide an attractive increasing benefit base for future retirement income.
$100,000 initial premium, income benefit base growing at 7 percent accumulated value growing at hypothetical rates. Notice in year two and year seven how the income benefit bases are increased by more than 7 percent.
Spotlight No. 3: Annual ratcheting of income during the payout phase
There are income benefits that can increase the income payments in retirement. This can happen even if the cash value of the policy is not growing above its starting value under the rider. It provides the opportunity for an increasing income while still maintaining the lifetime payment guarantee.
$100,000 initial premium, accumulated value is being credited at the listed hypothetical rates.
Another version of spotlight idea No. 3 is when some companies offer income that increases at a fixed percentage each year for example 3 percent at shown below. As compared to traditional level payments the payments start lower but increase each year.
Spotlight No. 4: Cumulative withdrawals
Some income benefits allow you to withdraw a lower amount of annual income. In the future you can take the cumulative amount you have accumulated in the benefit. This provides additional cash flow at a later date without lowering your guaranteed lifetime payment.
Spotlight No. 5: Non-qualified income without flipping the switch
It is possible to take normal withdrawals under a contract without turning on income. For example, you could withdraw five percent of your starting balance per year while still keeping the roll-up rate accumulating at seven percent. This is usually called a pro-rata withdrawal. It has potential to do great things for your clients' non-qualified and qualified funds. In the example below the customer withdrawals $5,000 for 10 years by taking "normal" withdrawals with out turning on the income provision of the rider. Ten years later they officially elect to take income under the rider and received $6,405 for life which is more than 30 percent higher than the amount they would have received if they would have turned on the benefit at age 60. Notice how the income benefit base continues to grow even while they are withdrawing dollars.
Non-qualified income without flipping the switch
This hypothetical illustration assumes $100,000 initial premium, no additional premium, no other withdrawals, 7 percent roll-up on the income benefit base and the single life level benefit was elected. This is not an illustration. It is not intended to predict past or future performance. The above chart illustrates a 2.0 percent net annual growth on the Accumulated Value. The accumulation rate on the income benefit base stops once withdrawals are elected under the rider.
The example below shows the same idea on a client age 70 that needs to take required minimum distributions (RMD) on their IRA. Notice at age 80 the income benefit base has grown to over $126,000 but the customer has been taking RMD's for 10 years.
Qualified income without flipping the switch
This hypothetical illustration assumes $100,000 initial premium, no additional premium, no other withdrawals, 7 percent roll-up on the income benefit base and the single life level benefit was elected. This not an illustration. It is not intended to predict past or future performance. The above chart illustrates a 2.0 percent net annual growth on the accumulated value. The accumulation rate on the income benefit base stops once withdrawals are elected under the rider.
Spotlight No. 6: Death benefit payout advantage
Some income benefits allow the beneficiary to receive the income benefit base over a five-year period upon death. For example, in year five instead of taking $$115,927 in a lump-sum upon death, the beneficiary has the choice to take $140,255 in the income benefit base in five equal payments. This provides an advantage of over $24,000 in 5 years.
$100,000 initial premium, income benefit base growing at 7 percent accumulated value growing at 3 percent net
Spotlight No. 7: Joint payout IRA
There are income benefits that allow individual owners on an IRA to select a joint payout option on the income benefit. This allows the owners to receive payments for life until the last surviving spouse dies. Many producers don't know this can be done with IRA qualified dollars.
Spotlight No. 8: Return of rider charges upon death
Some income benefits allow a full refund of the income rider charges upon death. The beneficiary can then receive the cash value in a lump-sum plus the cumulative cost of the rider charges. This increases the total death benefit.
Spotlight No. 9: Inflation protector
There are income benefits available guaranteed to increase each year. These benefits are tied to the Consumer Price Index. Your client can receive payments that can increase each year while the initial payment level is guaranteed for life.
Fixed annuity income payments are adjusted each year based on the movement of the CPI. Payments start lower and increase when the CPI increases, decrease when the CPI decreases, and never decrease below than the starting income payment. Over the last 30 years it has averaged over a four percent increase.
This chapter of Randy's Annuity Notebook, with additional details, is also available in a 45-minute educational webinar replay. To learn more about the companies that offer these great benefits. I encourage you to contact me using the forum below. To access the webinar replay please click here. (http://www1.gotomeeting.com/register/333657833.)
*For further information, or to contact this author about a 45-minute educational Webinar on this subject, please leave a comment and your e-mail address in the forum below.