Guaranteed Lifetime Income Benefits – Part 3: What’s Guaranteed?
By Jonathan C. Illig, Brokers Alliance
Most Guaranteed Lifetime Income Benefits are fully guaranteed, others not so much; does your client understand what they have?
Guaranteed Lifetime Income Benefits, or GLIB (also known as Guaranteed Lifetime Withdrawal Benefits, or GLWB), are one of the primary drivers for deferred annuity sales. This is because they provide both practical and emotional benefits in retirement by providing a lifetime income stream that the Owner cannot outlive, while providing retained access to the Owner's base contract Account Value. In previous articles (Guaranteed Lifetime Income Benefits, Part 1 and Part 2), the technical functioning and positioning of GLIB were discussed; herein is an examination of the different types of guarantees associated with GLIB, and how they might impact the Owner.
Background: The Two Core GLIB Guarantees to the Owner
As discussed in Part 1, the majority of GLIB riders currently available with deferred annuities are associated with Fixed Indexed Annuity base contract chassis’, and provide two forms of guarantee to the client (in addition to the market loss protection provided by the base annuity contract); the first guarantee is the growth of the Income Base that determines the amount of lifetime income withdrawals, while the second guarantee is that of the lifetime income withdrawal even if the base contract Account Value is eventually depleted. From the client standpoint, these two guarantees provide two key practical and emotional benefits:
- During the deferral period (prior to commencement of lifetime income), the client knows that the “future income value” of their money (premium) is growing regardless of whether or not the equity markets are increasing. Thus, the annuity professional can legitimately state to the effect that “the value that determines your future retirement income will grow, no matter what happens in the financial markets.”
- During the payout period (after commencement of lifetime income), the client knows that the income stream will remain reliable, predictable, and sustainable for their lifetime, no matter how long they live (assuming of course that they “play by the rules” and don’t make excess withdrawals). Thus, the annuity professional can legitimately state to the effect that “the income stream throughout your retirement lifetime will always be there, no matter what happens in the financial markets.”
Some GLIB Provide Only One Core Guarantee to the Owner
As briefly mentioned in Part 1, some insurance companies offer GLIB riders, again associated with Fixed Indexed Annuity chassis’, that don’t actually provide the first guarantee to the client, that is the guarantee that during the deferral period, the client knows that the “future income value” of their money is growing regardless of whether or not the equity markets are increasing. Instead of a fully guaranteed method of growing the Income Base Value during deferral, the Income Base Value grows at a multiple of interest earnings credited to the base contract Account Value (for example, the Income Base grows at 150% of the interest credited to the Account Value).
NOW, this Author is not implying that this is necessarily a “bad” GLIB method, for some clients it might well be a very good GLIB method; like all financial tools, so long as the client understands how the product works and is OK with it (and has been informed that there are other fully guaranteed GLIB growth options available), it may be appropriate. In fact, if the associated Index does produce good crediting results, the Income Base growth could well be superior to fully guaranteed growth at a lower rate. As always with indexed interest methods, it depends upon what the market does.
Having stated the above, one must nonetheless recognize that non-guaranteed Income Base growth could result in the client basing their GLIB income upon their premium (and perhaps a premium bonus), or perhaps premium plus a little bit of interest earnings times the multiple percentage. This would of course happen only if the associated Index did not produce interest crediting, which would happen in a period of sustained flat or negative markets. Many would argue that this is unlikely to happen; they might be right. In recent history we’ve only seen sustained “down” equity markets (S&P 500) from 2000 through 2002, and from November 2007 through February 2009 (S&P 500). But is that really the point? Does past performance guarantee future results? The purpose of guaranteed annuities, and particularly GLWB, is to provide guarantees. To paraphrase annuity professional and ubiquitous annuity author Stan Haithcock: “We sell annuities for what they will do, not for what they might do.”
Some GLIB Do a Little of Both
Thus far in our examination of GLIB, we’ve looked at two ends of the spectrum as regards the guaranteed growth of the Income Base Value; fully guaranteed growth and non-guaranteed growth. Some insurance companies offer GLIB that are a combination of the two, in various forms. In this case, the growth of the Income Base Value has a fully guaranteed component and a component based upon interest earnings credited to the base contract Account Value. Again, as with non-guaranteed growth GLIB, this may be perfectly suitable for the client, so long as they understand how it works, what is and is not guaranteed, and that they are informed of the other options available.
The purpose of the foregoing treatise is simple - as an annuity professional, know your product offering! Be sure you fully understand the potential pros and cons of any GLIB design, how that compares to offerings from other insurance companies, and ensure that in the placement process that your client understands as well. While the role of quality marketing organizations is to introduce products, train, and support you in your annuity sales, of course it is ultimately your signature on the application, your client, and thus your responsibility to fully understand the annuities you offer your clients.
Jonathan C. Illig, Executive Sales Consultant at Brokers Alliance, is an 18 year veteran in annuity sales and support.
Jon may be reached at [email protected].
Brokers Alliance, Inc. has been serving the Brokerage Community in the areas of Life, Annuity, Retirement & Estate Planning, Long Term Care, and Disability Insurance for over 30 years. With 50+ employees, we are devoted to growing your business with superior Marketing Programs, Case Management, and Product expertise. Call Brokers Alliance at (800) 290-7226 or visit us at www.BrokersAlliance.com