A Guaranteed Lifetime Withdrawal Benefit Rider (GLWB) is a rider that guarantees lifetime income for the annuitant at specified ages.
The lifetime income is most often designated as factor that when multiplied by an account value, yields the lifetime benefit amount. For example: a lifetime benefit factor of 5.5% and an account balance of $100,000 would result in an annual lifetime income of $5,500.
A GLWB rider is most often attached to a fixed equity indexed annuities to create what is commonly called a ‘hybrid annuity’. A hybrid annuity is designed to offer both growth for retirement accumulations in the form of policy cash values and guaranteed lifetime retirement income options based on values greater than the policy cash value.
A guaranteed lifetime withdrawal benefit (GLWB) rider has two parts: an accumulation account and a payout table of lifetime income factors. The easy way to think of a GLWB is as a bucket and a spigot. The accumulation account is the bucket, but the spigot controls all distributions. No matter how large the bucket, the size of the spigot determines the flow and therefore how fast you can withdraw the account value.
The accumulation portion of the GLWB is a bookkeeping entry. It has no cash value. Any assets backing the GLWB are the exclusive property of the insurance carrier. The policyholder’s only access to the GLWB account value is through the spigot.
The carrier can pay a higher rate to the bucket account because they do not have to reserve as much as they do for cash values and because the annuity owners who elect lifetime retirement income benefits get the benefit of forfeitures from annuity owners who surrender early, die early or elect not to use the lifetime income benefits. In addition, the bucket account is often subsidized by levying a fee on cash value growth. Be sure to check this account charge and its projected effect on your cash value account when selecting a GLWB.
When the annuitant elects a lifetime retirement income, withdrawals are taken out of cash values first. When cash values have been exhausted the bucket takes over and provides income as long as the annuitant lives. Once a lifetime benefit begins, the bucket can never run dry, because the insurance company is obligated to keep it full enough to continue your benefit.
Every GLWB rider has published table of lifetime income benefits for various ages. Most riders also offer joint lifetime income benefits which include the life of the spouse and many have additional options to periodically adjust the lifetime income to offset inflation.
The only way to benefit from most GLWB riders is to live long enough to collect the promised income. You can have a million dollars in your GLWB account, but if your health is poor, you will not live long enough to withdraw it. GLWB income levels are based on an average life expectancy. If you or your spouse is in excellent health and have a history of longevity in your family, then a GLWB is an excellent buy for you, because you will be getting an advantage based on your expected mortality. Alternatively, individuals with significant health issues should consider a GLWB carefully, because their actuarial chances of benefiting from the income will be lower than average.
The GLWB makes an excellent longevity reserve. Individuals with a cash rich retirement plan will probably have plenty of retirement resources to seen them carefully through their life expectancy. However, if they live into their late eighties or early nineties, their retirement assets might be expended. A hybrid annuity with a high quality GLWB offers an emergency reserve. The indexed side of the hybrid annuity will have a long time to compound stock market based returns and the GLWB portion stands ready to step in and guarantee a lifetime income.
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