Living Benefits

VARIABLE ANNUITIES are tax-deferred savings vehicles, not unlike IRAs but more costly. We talk more about them in the chapter that covers taxes. Variable annuities can be used to generate lifetime income, while still leaving you as owner of the account’s assets, by adding a living benefits rider.

There are two types of rider that can provide lifetime income: a guaranteed lifetime withdrawal benefit (GLWB) and a guaranteed minimum income benefit (GMIB). With a GLWB, you might be assured annual income for life equal to 4% to 6% of your account’s initial value, depending on your age when you begin withdrawals. If your investment choices perform well, and your account increases in value even after accounting for the annuity’s investment costs and your own withdrawals, your annual income can rise.

With a GMIB, there might also be a 4% to 6% initial guarantee, which you can take as a withdrawal or use to increase your “income base,” which is an accounting device that’s distinct from the account’s actual value. The increased income base will mean higher income in future years. What if you add a GMIB rider and then deplete the annuity’s actual value through some combination of withdrawals and bad investment performance? After a waiting period, which is typically 10 years from the time you added the GMIB rider, you can swap into an immediate fixed annuity. That annuity will give you regular income for life based on your income base. This immediate fixed annuity may pay less income than the amount you were initially receiving based on the 4% to 6%.

The big problem with living benefits: Not only are they complicated, but also the annual costs are high. Result? While you might score some income increases in the early years, the high costs will eventually take their toll, and there’s a risk you won’t see any further income increases. Indeed, between the high costs and your own withdrawals, the account may not be worth much by the time you die. What to do? In an effort to boost performance, you might invest the annuity heavily in stocks. That way, you are also taking advantage of the downside protection that’s costing you so much. If your investment bets go wrong, you can always fall back on the annuity’s guaranteed minimum.

Next: Immediate Variable

Previous: Longevity Insurance

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