Annuity Guarantees

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on May 23, 2023

What Are Annuity Guarantees?

Annuity guarantees are features built into annuity contracts that ensure a minimum level of income, accumulation, or withdrawal benefits for the annuitant, regardless of market conditions or life expectancy.

These guarantees provide financial security for retirees by offering a stable income stream, protecting against longevity risk, and preserving their principal investment.

The three main types of annuity guarantees are guaranteed income, guaranteed withdrawal benefits, and guaranteed accumulation benefits, each designed to address specific retirement needs and financial goals.

Types of Annuity Guarantees

Guaranteed Income

Guaranteed income is a core feature of annuities that ensures a steady stream of income for the annuitant, regardless of market fluctuations or investment performance.

Fixed Annuities

Fixed annuities provide a guaranteed income for a specified period or the annuitant's lifetime. The income amount is determined at the outset of the contract and remains constant throughout the payment period.

Variable Annuities With Guaranteed Income Riders

Variable annuities offer investment options that can potentially grow over time.

To provide a guaranteed income stream, these annuities can include optional riders, such as a guaranteed minimum income benefit (GMIB), which ensures a minimum level of income regardless of investment performance.

Guaranteed Withdrawal Benefits

Guaranteed withdrawal benefits allow annuitants to withdraw a specific percentage of their investment each year without depleting their principal.

Guaranteed Minimum Withdrawal Benefit (GMWB)

A Guaranteed Minimum Withdrawal Benefit (GMWB) guarantees that the annuitant can withdraw a minimum percentage of their initial investment each year, regardless of investment performance.

If the annuity's value falls below the initial investment, the insurance company will continue to make the guaranteed withdrawal payments.

Guaranteed Lifetime Withdrawal Benefit (GLWB)

A Guaranteed Lifetime Withdrawal Benefit (GLWB) offers a similar benefit to the GMWB but guarantees the withdrawal payments for the annuitant's lifetime. This feature provides a lifetime income stream while preserving the principal investment.

Guaranteed Accumulation Benefits

Guaranteed accumulation benefits protect the annuitant's investment, ensuring that the annuity's value will not fall below a certain level.

Guaranteed Minimum Accumulation Benefit (GMAB)

A Guaranteed Minimum Accumulation Benefit (GMAB) guarantees that, after a specified period, the annuity's value will be at least equal to the total amount of premiums paid, regardless of investment performance.

Guaranteed Minimum Maturity Benefit (GMMB)

A Guaranteed Minimum Maturity Benefit (GMMB) ensures that, at the end of the annuity's accumulation phase, the annuity's value will be at least equal to a predetermined amount, regardless of investment performance.

Types of Annuity Guarantees

Factors Affecting Annuity Guarantees

Duration of the Guarantee

The length of time the guarantee is in effect can vary, depending on the specific annuity contract. Some guarantees last for a set number of years, while others may last for the lifetime of the annuitant.

Age and Health of the Annuitant

The annuitant's age and health can impact the cost and availability of annuity guarantees. Generally, older individuals and those with health issues may face higher costs for guarantees or may be ineligible for certain types of guarantees.

Investment Performance

While annuity guarantees are designed to protect the annuitant from poor investment performance, the actual value of the annuity and the income it provides can still be influenced by the performance of the underlying investments.

Fees and Expenses

Annuity guarantees come with additional fees and expenses, which can reduce the overall return on the annuity. These fees may include rider charges, mortality and expense risk charges, and administrative fees.

Factors Affecting Annuity Guarantee

Benefits of Annuity Guarantees

Protection Against Longevity Risk

Annuity guarantees help protect against the risk of outliving one's savings by providing a guaranteed income stream for a specified period of the annuitant's lifetime.

Predictable Income Streams

Annuity guarantees provide a predictable and stable source of income, regardless of market fluctuations or investment performance.

Preservation of Principal

Guaranteed withdrawal and accumulation benefits help protect the annuitant's principal investment, ensuring that their initial investment is not depleted due to market downturns or poor investment performance.

Tax-Deferred Growth

Annuities offer tax-deferred growth, allowing the annuitant's investment to grow without being subject to taxes until the funds are withdrawn.

Risks and Limitations of Annuity Guarantees

Credit Risk of the Issuing Insurance Company

The financial strength of the issuing insurance company backs annuity guarantees. If the insurer becomes insolvent or unable to meet its obligations, the annuitant's guarantees may be at risk.

Inflation Risk

Fixed annuity payments may not keep up with inflation, which can erode the purchasing power of the annuitant's income over time.

Limited Liquidity

Annuities often come with surrender charges, which can make it expensive to access funds in the early years of the contract. Additionally, withdrawal benefits may be subject to certain restrictions and limitations.

High Fees and Surrender Charges

Annuity guarantees come with additional fees, which can reduce the overall return on the annuity. Surrender charges can also make it expensive to exit the annuity contract early.

Benefits and Risks of Annuity Guarantees

Evaluating Annuity Guarantees

Comparing Annuity Products

When considering annuity guarantees, comparing different annuity products and their associated costs, benefits, and features is essential.

Assessing the Financial Strength of Insurance Companies

Before purchasing an annuity, it's crucial to research the financial strength and credit rating of the issuing insurance company to ensure they can fulfill their obligations and guarantees.

Working With a Financial Advisor

A financial advisor can help assess an individual's financial goals, risk tolerance, and retirement needs and recommend suitable annuity products with appropriate guarantees.

Conclusion

Annuity guarantees offer a valuable means of securing financial stability during retirement by providing a predictable income stream, protection against longevity risk, and preservation of principal investment.

However, it is crucial to consider the various types of guarantees available carefully, their associated costs and fees, and the potential risks and limitations, such as credit risk, inflation, and limited liquidity.

Given the complexity of annuity products and the importance of choosing the right guarantees for your unique financial situation, working with an experienced insurance broker is highly recommended.

An insurance broker can help you navigate the vast array of annuity options, assess the financial strength of insurance companies, and tailor a product that aligns with your financial goals and retirement needs.

Annuity Guarantees FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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