Are Fixed Annuity GLWBs Needed?
January 9, 2010 by Sheryl J. Moore
- By SHERYL MOORE
One year ago, no fixed annuity offered guaranteed lifetime withdrawal (GLWB) benefits.
Today, over half of the top-selling fixed indexed rate carriers and a couple of the fixed stated rate carriers offer the benefit on at least some of their annuities, and most of the carriers we consult with will be adding the benefit in the future.
Why the growth? GLWBs offer an income that is guaranteed for life—as annuitization can provide. But, unlike annuitization, selecting a GLWB preserves access to account values.
A typical fixed annuity GLWB would provide a 5% lifetime payout to a 65-year-old and a 6% lifetime payout to a 75-year-old. If the account runs out of cash because the payout is greater than the earnings, the carrier guarantees to continue paying the income for life out of its own pocket.
However, the big attraction with a GLWB is, if extra cash is needed or if the recipient dies, the annuity will distribute the account value less any liquidity charges. Further, unlike the annuitization route, the GLWB preserves the hope that the account value could grow while the annuitant is receiving payouts.
That means the customer may be able to both eat retirement cake and have some of it pass on to heirs.
The benefit sounds attractive, but from a purely economic point of view, is it needed on a fixed annuity?
GLWBs were first offered on variable annuities. The story here is the same one mentioned above with one important addition: a variable annuity GLWB protects the income from stock market risk of loss that could severely lessen the income.
From a purely rational economic look, using a GLWB with a VA can be justified—because there is a distinct possibility that, due to market losses, the annuity’s owner could run out of money before death.
However, fixed annuities are not subject to stock market risk of loss and they even guarantee a minimum return. This is what raises the question about the need for the feature in a fixed annuity.
Let’s say the customer earns a 2% minimum guaranteed return. If age 65 and taking 5% in payouts, or if age 75 and receiving 6%, the payouts will last into the customer’s 90s. This is a lot longer than life expectancy for most people (2002 U.S. Life Tables). What’s more, if the customer can find a minimum guaranteed rate of 3%, the above payouts flirt with the centennial mark.
Because of these minimum guarantees, and the certainty that credited gains can never be lost, the odds of the “G” in the GLWB kicking in is pretty small.
This does not mean the benefit isn’t worthwhile. From a consumer economic behavioral aspect, a fixed annuity GLWB is very attractive because it helps remove a significant fear—the fear of outliving one’s money.
Even though the odds are low that this could happen with the fixed annuity payouts used, it can still happen. The GLWB provides insurance that covers this risk at a relatively low cost.