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Guaranteed Lifetime Withdrawal Benefit Annuity Rider
Tax-deferred annuities can be valuable tools, particularly for retirement savings. Fixed and variable annuities earn interest on premiums paid to the annuity issuer, and interest earnings accrue tax deferred prior to being withdrawn. Variable annuities offer purchasers a choice of investment subaccounts into which the premium may be allocated, whereas fixed annuities pay interest based on a fixed rate determined by the issuer. Both types of deferred annuities offer a minimum death benefit. Deferred annuities also provide withdrawal options including payments that last for the life of the purchaser (annuitization). Due to growing demand for additional income options, some issuers are offering a rider, called a guaranteed lifetime withdrawal benefit (GLWB), which allows you to get lifetime income while continuing to have access to the annuity's remaining cash value.
Here's how it works
There are different variations of the GLWB rider, depending on the issuer offering it, but they all incorporate some common features. Your annuity premium is invested in subaccounts (with a variable annuity) or earns interest (with a fixed index annuity). Thereafter, you can elect to receive annual withdrawals from the annuity that last for the rest of your life (minimum guaranteed withdrawal). The amount of the withdrawal is determined by applying a percentage (withdrawal percentage) to the premium, or the cash value, whichever is greater at the time of your election. Withdrawals are subtracted from the cash value and may reduce it. The amount of the withdrawal will not decrease, even if the cash value decreases or is exhausted. In addition, you continue to control the investment of the remaining cash value within the annuity, and have access to it.
For example, you invest $100,000 in a variable annuity with a withdrawal percentage of 5%. In five years, you elect to begin receiving minimum guaranteed withdrawals, but the cash value is worth only $80,000 (due to poor subaccount performance). The withdrawal percentage (5%) is applied to your premium ($100,000) since it is greater than the cash value at the time of your election. Your minimum guaranteed withdrawal is $5,000 per year ($100,000 x 5%).*
Some issuers apply a minimum rate of return to your premium (minimum income value) apart from your cash value. In this case, the withdrawal percentage is applied to the greater of your minimum income value or your cash value to determine your guaranteed minimum withdrawal. This option ensures that the amount of your minimum guaranteed withdrawal increases each year you defer receiving withdrawals.
To illustrate, use the same facts as the previous example, but include a minimum income value of 6% per year applied to your premium ($100,000). When you elect to receive withdrawals, the minimum income value is $133,823 ($100,000 x 6% per year x 5 years). Since this value is greater than your cash value ($80,000), the withdrawal percentage (5%) is applied to the minimum income value yielding a minimum guaranteed withdrawal of $6,691 per year ($133,823 x 5%).*
*Examples are for illustration purposes only and do not reflect the actual performance of a specific product or investment.
Issuers may also increase your guaranteed minimum withdrawal by increasing the withdrawal percentage as the age at which you begin to receive withdrawals increases. For example, the withdrawal percentage could be 5% at age 55, 7% at age 70, and 8% at age 80.
The step-up feature
It's possible the GLWB payments can increase over time if the issuer includes a step-up feature with the rider. At certain intervals (usually once every five or ten years), the issuer compares the annuity's current cash value to the value used to determine your minimum guaranteed withdrawal. If the current value is greater, the issuer applies the withdrawal percentage to the current, higher value, thus increasing your minimum guaranteed withdrawals.
Say your minimum guaranteed withdrawals are $7,500 per year, based on a withdrawal percentage of 5% applied to the annuity's cash value of $150,000. Five years later, the annuity's cash value increases to $160,000. The new minimum guaranteed withdrawal is $8,000 per year due to the increased cash value ($160,000 x 5% per year). The new minimum guaranteed withdrawal will not decrease, even if the annuity's cash value later decreases, or is exhausted.