How To Choose a Living Benefit

Living benefits have become a popular feature of variable annuity policies because they help protect variable annuity owners from investment risk. The motivation for purchasing living benefits is to minimize the chance of failure — that is, your investments underperforming so that you lose some of the premium you invested in the annuity. 

Each living benefit comes with certain guarantees, restrictions and other features. Because they can become quite complex, many annuity customers have difficulty grasping the complicated provisions of variable annuity contracts with living benefits.

If you’re thinking about purchasing a variable annuity with a living benefit, start by considering your priorities and objectives to choose which type of living benefit you want. Then research annuity providers who offer that benefit and make sure you understand what the rider entails.

Consider Your Priorities and Objectives

The four main types of living benefits each offer different guarantees, so finding the best one for you means understanding what you want from your variable annuity contract. “The main factor that should be considered when finding the proper annuity is your goal,” Moshe Goykhman, an annuity research specialist, told Annuity.org. “For example, two of the most common objectives are guaranteed income and protected growth.”

Priority: Protected Growth

If your primary reason for purchasing an annuity is protected growth, consider the guaranteed minimum accumulation benefit (GMAB) or the guaranteed minimum withdrawal benefit (GMWB).

The GMAB rider guarantees a return of your premium investment amount, or sometimes a higher stepped-up value at the end of your contract’s surrender period. Regardless of how your investments perform, you’re guaranteed to get your full premium payments back with a GMAB.

Alternatively, a GMWB rider allows you to withdraw 3% to 7% of your premium amount from your annuity annually with no waiting period. You can start withdrawing income from your annuity immediately and will continue to receive income at least until your principal is returned, regardless of investment performance.

Don’t be put off by the similar, and sometimes confusing, acronyms of the living benefit riders. If an agent or an advisor makes your eyes blur by speaking only in code, find a different one. But continue to research these options which can be a confidence booster and insurance policy for your savings and retirement goals. Living benefit riders can limit the risk of your investments during those precarious final years ahead of retirement.

Stephen Kates, CFP®Principal Financial Analyst for Annuity.org

Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

Priority: Guaranteed Income

Many customers choose annuities over other retirement savings vehicles because annuities offer a guaranteed income stream you can’t outlive. With variable annuities, owners can establish this income stream through two types of living benefit riders: the guaranteed minimum income benefit (GMIB) and the guaranteed lifetime withdrawal benefit (GLWB).

A GLWB rider shares some similarities with a traditional GMWB rider. With a GLWB, you are entitled to withdraw 3% to 7% from your variable annuity each year. The main difference is that a GLWB allows you to continue withdrawing that income for life, even if your contract’s value drops to zero.

The GMIB rider, meanwhile, guarantees a minimum rate of return and a minimum income you’ll receive each year for life. Using this benefit requires a seven to 10 year holding period and the contract must be annuitized.

Benefit Type	Guarantee	Ideal For
Guaranteed Minimum Accumulation Benefit (GMAB)	Return of premium at the end of the surrender period	Protecting growth
Guaranteed Minimum Withdrawal Benefit (GMWB)	Return of premium cumulatively through annual withdrawals equal to 3% to 7% of the principal amount or contract value	Protecting growth
Guaranteed Lifetime Withdrawal Benefit (GLWB)	Annual income of 3% to 7% of  the principal amount or contract value	Guaranteeing income
Guaranteed Minimum Income Benefit (GMIB)	A minimum annual income after a holding period and once the contract is annuitized	Guaranteeing income

Questions To Ask About Living Benefits Riders

The complex nature of living benefits may lead to some confusion when the time comes to purchase an annuity. These benefits can provide peace of mind with guarantees of principal protection or guaranteed income, but these perks come with certain trade-offs.

Before you sign a contract, make sure you fully understand what you’re getting and work directly with a financial advisor who can walk you through the ins and outs of different annuity contracts and riders.

Here are some important questions to ask when reviewing a variable annuity contract with a living benefit rider:

• What is the minimum required investment?
• Does the contract have a penalty period? If so, how much is the penalty?
• What are the total costs of the contract, with and without the living benefit?
• Can the living benefit be “turned on” or “turned off” and when is that allowed?
• What are my investment choices if I add a living benefit rider?
• At what age, if any, does the living benefit terminate?
• What happens if I pass away before I use the living benefit?
• What are my payout options during and after the penalty period?
• Is the distribution phase based on someone’s life expectancy, or is it based on a set number of years?
• How do withdrawals work before locking into a living benefit?

Source: Institute of Business and Finance

Whether you speak with a financial advisor or an annuity broker, one of the most important questions to ask is what happens to your contract once you use your benefit. 

Many variable annuity owners run into complications after they use their living benefits. These benefits work by transferring some of the annuity owner’s risk to the insurance company, which guarantees income or rate of return regardless of investment performance. 

The insurer may offset this risk in a few ways, including:

• Requiring a minimum holding period.
• Not allowing the owner to take a lump-sum payout from their annuity.
• Requiring a strict distribution schedule for the annuity payouts.
• Not crediting the remaining principal any growth during the distribution phase.

Understanding the trade-offs of a living benefit’s advantages can help you make an informed choice when purchasing a variable annuity. 

Another factor to consider is the limitations of investment options. When you add a living benefit to your variable annuity contract, your provider may limit the subaccounts toward which you can allocate your assets. This is yet another way that insurers balance their own risk when an owner utilizes a living benefit.