how glwb riders work
variable annuities have a cash value that s equal to the premiums you have paid plus or minus any market returns with a glwb rider however the contract has a separate benefit base sometimes called a withdrawal base that is used to calculate lifetime withdrawals once you elect to receive your income stream this benefit base is used to determine the amount of your minimum guaranteed withdrawal depending on the terms of the contract and your age a certain percentage is applied to the benefit base to determine your guaranteed annual payment it is usually determined by your age at the start of annuitization here s an example if you are 65 when you make your first withdrawal your contract might stipulate a 5 withdrawal rate whereas if you start receiving payouts at 70 your stipulated rate might 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 when you start receiving guaranteed payments 1 for example say you invested 50 000 in premiums and have a withdrawal rate of 5 but your cash value is only 35 000 when you elect to annuitize due to poor market performance the issuer would take the higher of these two amounts your benefit base of 50 000 to calculate the guaranteed minimum withdrawals this means you would receive 2 500 per year 50 000 0 05 withdrawal rate glwb riders may also allow you to make additional withdrawals from your cash value even during the annuitization phase however doing so usually results in a reduction of your benefit base 1for example a withdrawal of 20 of your cash value would lead to a 20 decrease in the guaranteed minimum payments for the remainder of your life in the example above such a withdrawal would decrease the glwb payment to 2 000 40 000 0 05 withdrawal rate most insurance companies charge an annual fee for taking on the market risk that would ordinarily be borne by the customer those costs can vary widely making it important to carefully review annuity documents before purchasing one potential glwb featuressome glwb riders come with additional benefits that can potentially increase the amount of your guaranteed withdrawal the issuer may charge an additional fee or roll it into the fee for the rider itself among the more common examples are the insurer may offer a minimum rate of return to your benefit base the withdrawal amount is based on the higher of your benefit base plus minimum return or the cash value 1suppose for example that you paid 50 000 in premiums but had a guaranteed 4 rate of return regardless of market conditions in two years that base would go up to 54 080 add 2 000 after the first year then 2 080 after the second year if the cash value remained at 50 000 the issuer would use the benefit base to calculate the lifetime payments assuming a 5 withdrawal percentage you would receive annual payouts of 2 704 54 080 0 05 withdrawal rate if 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 determine the glwb if the cash balance is higher it will adjust the benefit accordingly 1suppose for instance 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 per year however if the cash balance five years later is now 60 000 then the 5 withdrawal rate would be applied to that higher amount thus going forward you would receive 3 000 per year 60 000 0 05 withdrawal rate pros and cons of a glwbthe primary benefit of a glwb rider is that it safeguards you from the possibility of receiving a lower lifetime payout if the market takes a hit in addition the rider allows you to access your cash value if you need it which you cannot do with a traditional annuity because it ties up the money you put into the contract once annuitization begins 1the downside of course is the additional cost of purchasing this protection those who start paying into the annuity well before they annuitize have a lower exposure to market risk as it is that is they have more time for the stocks and bonds in their subaccounts to recover therefore customers with a longer time horizon may want to avoid the extra fee that comes with a glwb rider 