Guaranteed Lifetime Withdrawal Benefit (GLWB)
What Is a Guaranteed Lifetime Withdrawal Benefit (GLWB)?
A guaranteed lifetime withdrawal benefit (GLWB) is a rider to a variable annuity that gives a base payout level, even assuming that market losses reduce the cash value of your contract. The greater part of these riders likewise permit you to make withdrawals from your cash value depending on the situation. You commonly pay for the GLWB rider with annual fees that can differ based on the issuer.
Grasping GLWBs
A annuity is a contract between the purchaser, called the "annuitant," and the issuer, wherein the annuitant makes a one-time payment or normal payments to the issuer. In exchange, the issuer makes periodic payments back to the annuitant until the end of their life or for a specific number of years.
On the off chance that you buy a fixed annuity, the issuer basically pays a fixed interest rate on the money you've paid to it. In any case, with a variable annuity, you can invest in the market through subaccounts. This feature offers greater growth potential, however it likewise subjects you to possible losses. A GLWB is a method for moderating that risk.
The GLWB rider guarantees that you receive a base lifetime payment that basically balances any losses in your subaccounts. Most issuers likewise permit you to make extra withdrawals from your cash value; be that as it may, these regularly reduce the guaranteed withdrawal amount.
How GLWB Riders Work
Variable annuities have a cash value that is equivalent to the premiums you have paid plus or minus any market returns. With a GLWB rider, notwithstanding, the contract has a separate benefit base — sometimes called a "withdrawal base" — that is utilized to work out lifetime withdrawals.
When you choose to receive your income stream, this benefit base is utilized to decide the amount of your base guaranteed withdrawal. Contingent upon the terms of the contract and your age, a certain percentage is applied to the benefit base to decide your guaranteed annual payment. It not entirely set in stone by your age toward the beginning of annuitization. For instance, on the off chance that you are 65 when you make your most memorable withdrawal, your contract could specify a 5% withdrawal rate, while assuming that you begin getting payouts at 70, your stipulated rate may be higher, say 5.25%.
A key feature of GLWB riders is that your withdrawal amount is based on either the benefit base or the cash value, whichever is higher at the time you begin getting guaranteed payments. Say, for instance, that you invested $50,000 in premiums and have a withdrawal rate of 5%, however your cash value is just $35,000 at the time you choose to annuitize, due to poor market performance. The issuer would take the higher of these two amounts, your benefit base of $50,000, to work out the guaranteed least withdrawals. This means you would receive $2,500 each year ($50,000 x 0.05 withdrawal rate).
GLWB riders may likewise permit you to make extra withdrawals from your cash value, even during the annuitization phase. Notwithstanding, doing so typically brings about a reduction of your benefit base. For instance, a withdrawal of 20% of your cash value would lead to a 20% decline in the guaranteed least payments until the end of your life. In the model above, such a withdrawal would diminish the GLWB payment to $2,000 ($40,000 x 0.05 withdrawal rate).
Most insurance companies charge an annual fee for taking on the market risk that would commonly be borne by the customer. Those costs can differ widely, making it important to carefully audit annuity reports before purchasing one.
Possible Features
Some GLWB riders accompany extra benefits that might possibly increase the amount of your guaranteed withdrawal. The issuer might charge an extra fee or roll it into the fee for the actual rider. Among the more normal models are:
Least Rate of Return
The insurer might offer a base rate of return to your benefit base. The withdrawal amount is based on the higher of your benefit base (plus least return) or the cash value. Suppose, for instance, that you paid $50,000 in premiums yet had a guaranteed 4% rate of return, paying little heed to market conditions. In two years, that base would go up to $54,080 (add $2,000 after the main year, then $2,080 after the subsequent year).
Assuming the cash value stayed at $50,000, the issuer would utilize the benefit base to ascertain the lifetime payments. Expecting a 5% withdrawal percentage, you would receive annual payouts of $2,704 ($54,080 x 0.05 withdrawal rate).
Step-Up Feature
On the off chance that the rider has a step-up feature, the insurer will periodically compare the current cash value in the account with the amount initially used to decide the GLWB. Assuming the cash balance is higher, it will change the benefit appropriately.
Suppose, for example, that the original withdrawal amount was based on a benefit base of $50,000, with a 5% withdrawal rate. That made the original guaranteed withdrawal $2,500 each year. Notwithstanding, assuming the cash balance five years after the fact is currently $60,000, the 5% withdrawal rate would be applied to that higher amount. Consequently, going ahead, you would receive $3,000 each year ($60,000 x 0.05 withdrawal rate).
Upsides and downsides of a GLWB
The primary benefit of a GLWB rider is that it shields you from the possibility of getting a lower lifetime payout assuming that the market endures a shot. Furthermore, the rider permits you to access your cash value on the off chance that you want it, which you can't do with a traditional annuity, since it ties up the money you put into the contract once annuitization starts.
The downside, of course, is the extra cost of purchasing this protection. The people who begin paying into the annuity a long time before they annuitize have a lower exposure to market risk for what it's worth — that is, they possess more energy for the stocks and bonds in their subaccounts to recuperate. Consequently, customers with a more drawn out time horizon might need to stay away from the extra fee that accompanies a GLWB rider.
Features
- Contingent upon the issuer and annuity, the GLWB might offer a "stepped-up" benefit if the investments in the annuity subaccounts gain value.
- The rider is frequently discretionary and accompanies extra fees and charges that annuitants ought to comprehend before signing up.
- A guaranteed lifetime withdrawal benefit (GLWB) is a rider that can be added to a variable annuity that offers protection against market losses.
FAQ
What Is the Step-Up Feature on a GLWB?
The step-up feature gives a bigger guaranteed benefit every year in the event that the cash value from the annuity's subaccounts has developed. At regular intervals the annuity issuer compares the original benefit base amount with the current cash value. Assuming the last option is greater, it will involve that figure as the basis for future guaranteed benefits.
What Are the Downsides of a GLWB?
The conspicuous entanglement to a GLWB rider on an annuity is the cost. The annual fee can go from 0.1% of the cash value on the contract to over 1.0%. It's important to peruse the annuity records carefully before you purchase this coverage.
What Is a Guaranteed Lifetime Withdrawal Benefit (GLWB)?
A guaranteed lifetime withdrawal benefit (GLWB) is a rider that you might have the option to add to your variable annuity contract. It guarantees a base payout level, even on the off chance that market losses reduce the cash value of the contract. Most riders likewise permit you to make withdrawals from your cash value depending on the situation.
