Variable Annuities With Living Benefit Riders

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Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on May 29, 2023

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What Are Variable Annuities With Living Benefit Riders?

Variable annuities are long-term investment vehicles that provide a way for individuals to accumulate tax-deferred savings for retirement.

They are contracts between investors and insurance companies, whereby the investor makes a lump sum payment or series of payments in exchange for periodic income payments during retirement.

The value of the investments within the annuity can fluctuate based on the performance of the underlying investment options.

Living benefit riders are optional features that can be added to variable annuities for an additional cost. These riders provide guarantees and protections related to the annuity's income and withdrawal features, ensuring a level of financial security for the policyholder during retirement.

The primary purpose of adding living benefit riders to variable annuities is to provide a guaranteed income stream, protection from market volatility, and financial security for retirees.

These riders help address common retirement concerns, such as outliving one's savings or navigating market downturns.

Types of Living Benefit Riders

Guaranteed Lifetime Withdrawal Benefit (GLWB)

Key Features

The Guaranteed Lifetime Withdrawal Benefit (GLWB) rider allows the annuity owner to withdraw a certain percentage of their investment each year, for as long as they live, regardless of market performance. This provides a predictable income stream throughout retirement.

Withdrawal Rates and Age Requirements

Withdrawal rates for GLWB riders typically range from 4% to 6% per year, depending on factors such as the annuity owner's age and the rider's specific terms. Some riders may also impose minimum age requirements before withdrawals can begin.

Guaranteed Minimum Income Benefit (GMIB)

Key Features

The Guaranteed Minimum Income Benefit (GMIB) rider provides a guaranteed minimum income for life, regardless of the annuity's investment performance.

The annuity owner must annuitize the contract to receive this income, meaning they give up control of the assets in exchange for regular income payments.

Annuity Income Calculation and Rates

The guaranteed income provided by a GMIB rider is calculated using a predetermined formula, which may consider factors such as the initial investment amount, age, and gender. The actual income payment could be higher if the annuity's investments perform well.

Guaranteed Minimum Withdrawal Benefit (GMWB)

Key Features

The Guaranteed Minimum Withdrawal Benefit (GMWB) rider ensures the annuity owner can withdraw a set percentage of their initial investment each year, regardless of investment performance.

If the account value falls due to poor market performance, the guarantee ensures the owner can still make withdrawals.

Withdrawal Percentage and Guarantee Periods

Withdrawal percentages for GMWB riders typically range from 5% to 10% per year. The guarantee period may vary, with some riders providing lifetime guarantees, while others may only offer a fixed number of years.

Guaranteed Minimum Accumulation Benefit (GMAB)

Key Features

The Guaranteed Minimum Accumulation Benefit (GMAB) rider provides a guarantee that the annuity's account value will not fall below a certain amount after a specified time period, regardless of market performance.

Time Horizons and Minimum Guaranteed Amounts

GMAB riders typically have time horizons ranging from 10 to 20 years. The minimum guaranteed amount is often expressed as a percentage of the initial investment or as a specific dollar amount.

Types of Living Benefit Riders

Costs and Fees Associated With Living Benefit Riders

Mortality and Expense Risk Charges

Variable annuities with living benefit riders often have mortality and expense risk charges, which compensate the insurance company for the risks they assume in providing the guarantees.

Administrative Fees

Insurance companies may charge administrative fees for managing the variable annuity and the associated living benefit riders.

Rider Fees

Adding living benefit riders to a variable annuity typically involves additional fees that are specific to each rider.

Fund Management Fees

Investment options within variable annuities may have management fees, which are charged by the investment managers for their services.

Surrender Charges

Surrender charges may apply if the annuity owner withdraws money from the annuity or cancels the contract before a specified time period has passed.

Advantages of Variable Annuities With Living Benefit Riders

Income Guarantees

Living benefit riders provide guaranteed income streams, ensuring retirees have a stable source of income throughout their retirement years.

Market Participation and Growth Potential

Variable annuities with living benefit riders allow investors to participate in market growth while still providing income guarantees. This offers the potential for higher returns compared to more conservative investment options.

Flexibility and Customization

Investors can choose from a variety of living benefit riders to tailor their variable annuity to their specific needs and retirement goals. This customization provides flexibility in retirement income planning.

Protection Against Outliving Savings

Living benefit riders help protect retirees from outliving their savings by providing guaranteed income streams for life, regardless of market performance or fluctuations in account value.

Tax-Deferred Growth

Variable annuities offer tax-deferred growth on the investment earnings, allowing investors to potentially accumulate more savings over time.

Advantages of Variable Annuities With Living Benefit Riders

Considerations for Variable Annuities With Living Benefit Riders

Market Risk

Variable annuities are subject to market risk, meaning the account value may fluctuate based on the performance of the underlying investments.

Inflation Risk

The income guarantees provided by living benefit riders may not keep pace with inflation, potentially eroding the purchasing power of the guaranteed income over time.

Rider Limitations

Living benefit riders may have specific limitations, such as withdrawal restrictions or waiting periods, which can impact the policyholder's flexibility.

Impact of Withdrawals on Guarantees

Excessive withdrawals can negatively impact the guarantees provided by living benefit riders, potentially reducing the guaranteed income available during retirement.

Long-Term Performance and Guarantees

The long-term performance of the variable annuity and the guarantees provided by the living benefit riders will depend on factors such as market performance, fees, and the financial strength of the insurance company.

Considerations for Variable Annuities With Living Benefit Riders

Choosing a Suitable Variable Annuity With Living Benefit Riders

Assess Personal Financial Goals

Before selecting a variable annuity with living benefit riders, it is essential for investors to evaluate their financial goals and determine how these products fit within their overall retirement plan.

Evaluate the Strength and Reputation of the Insurance Company

It is crucial to research and select an insurance company with a strong financial rating and a positive reputation for managing variable annuities and living benefit riders.

Compare Different Rider Options

Investors should compare various living benefit riders, considering factors such as fees, guarantees, and restrictions to determine the best fit for their needs.

Work With a Financial Advisor

Consulting with a financial advisor can help investors navigate the complex world of variable annuities and living benefit riders, ensuring they make well-informed decisions aligned with their retirement goals.

Choosing a Suitable Variable Annuity With Living Benefit Riders

The Bottom Line

Variable annuities with living benefit riders can provide valuable guarantees and protections for retirees, but it is essential for investors to understand the associated costs, risks, and benefits before committing to such an investment.

A thorough understanding of these products will help investors make informed decisions and determine if a variable annuity with living benefit riders is the right fit for their retirement strategy.

Investors must carefully weigh the potential benefits of variable annuities with living benefit riders against the associated costs and risks.

While these products can provide valuable income guarantees and market protection, they may also come with higher fees and limitations compared to other investment options.

Variable annuities with living benefit riders can play a valuable role in a comprehensive retirement plan by providing guaranteed income, market protection, and tax-deferred growth. However, they should not be considered a one-size-fits-all solution.

Instead, investors should consider these products as one component of a diversified retirement portfolio designed to meet their unique financial needs and goals.

Consult an insurance broker or financial advisor for expert guidance on variable annuities with living benefit riders.

Variable Annuities With Living Benefit Riders FAQs

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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 or view his author profiles on Amazon, Nasdaq and Forbes.

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