By Jonathan C. Illig, Brokers Alliance
Part 1 was a technical primer on GLIB. In Part 2, we discuss explaining and positioning them to the client.
Guaranteed Lifetime Income Benefits, or GLIB, are a very useful and popular tool in retirement income planning for today's
retiree. Typically an optional rider to a deferred annuity, their core benefit is providing a guaranteed lifetime income stream in the form of a systematic withdrawal, while at the same time keeping the owner in control of their Account Value (cash), because the benefit is not an annuitization, rather it is a systematic withdrawal. The technical aspects of how GLIB work to provide this benefit was detailed in a previous article titled Guaranteed Lifetime Income Benefits - Part 1: A Primer. In this article, we’ll discuss explaining and positioning the GLIB to the client..
Explaining the GLIB to the Client
In the absence of a professionally-prepared animated presentation or video, the most common way to explain the GLIB to the client is to use a “T diagram” on a yellow pad or whiteboard, as we see in the illustration to the right. This explanation is both simple and effective if properly executed. The value of the “T diagram” is that it clearly distinguishes the Account Value from the Income Base Value (as mentioned in Part 1, these values are “apples and oranges”).
Begin the explanation by drawing the “T”, and making it clear to the client that prior to starting lifetime income, the annuity will track two separate values. Label the left side of the “T” as Account Value, and the right side of the “T” as Income Base Value. Next, make it clear that the Account Value is money by labeling the Account Value as Cash, and the Income Base Value as Income Formula, Not Cash.
Under the Account Value, explain that the Account Value grows based upon the interest rate strategy, for example you might write Growth: Indexed Interest in that column. Next, in the Income Base column, explain to the client that Income Base will grow at a guaranteed rate; for example, you might write Growth: Guaranteed at 8% Simple. Emphasize that the guaranteed growth rate applies only to the Income Base; it is part of the math formula used to determine the eventual dollar amount of the lifetime income benefit. Explain to the client that when they trigger their lifetime income, the withdrawal dollar value will be determined by multiplying the Income Base Value by a factor corresponding to their age at the time the benefit begins; you might write in the column Value x Factor determines amount of life income withdrawal.
Next, draw an arrow from the right Income Base Value column across the “T” line to the Account value column on the left, explaining that once the amount of lifetime income is determined and withdrawals commence, the withdrawals are deducted from their annuity Account Value; you might write in the column Income Withdrawals deducted from Acct Value. Further explain that over time, and especially if they live a long time, that even though the Account Value continues to earn interest, the lifetime income withdrawals may eventually deplete the Account Value, and that in this event, they will continue to receive the income even if the Account Value is emptied, no matter how long they live; you might write You are gtd the income for life even if Acct Value depletes. Complete the explanation with a discussion of the GLIB rider fees, the effect upon guaranteed income if they withdraw more than the guaranteed amount, and other elements of the GLIB and base annuity contract, and of course, answer any questions they have.
This simple “T” diagram method, again if executed properly, is a simple and effective way to ensure that the client understands the key elements of the GLIB. Naturally, once a specific annuity is recommended, you should then use the carrier-produced materials for specific details.
Positioning the Value of the GLIB to the Client
A deferred annuity with a GLIB provides the client with a combination of practical and emotional benefits that are difficult, if
not impossible, to replicate with other financial tools:
- Control of, and access to, their retirement savings both before and after retirement.
- Certainty that their retirement savings will produce a predictable and specific amount of retirement income regardless of economic or financial market conditions before and after retirement.
- A lifetime income stream that is not only predictable and guaranteed, but is also a very respectable percentage of the retirement savings allocated to the annuity with GLIB.
To illustrate this last point, look at the illustration below for an annuity with GLIB, $100,000 premium, issued to a 65-year-old with intent to trigger the GLIB income at age 70 retirement (the start of contract year 5):
Looking at the above illustration, we see that the GLIB income withdrawal at age 70 is $7,800 annually. When the GLIB income is commenced at age 70:
- The GLIB lifetime income is equal to 7.80% of the original $100,000 premium ($7,800 / $100,000 = 7.80%).
- The GLIB lifetime income is equal to 6.95% of the projected $112,198 Account Value ($7,800 / $112,198 = 6.95%).
Positioning the GLIB income as a percentage of original premium and as a percentage of the Account Value that is guaranteed for lifetime, no matter how long the client lives, is very powerful and also very accurate. Using this same concept, looking again at the above illustration, note that the GLIB income at the start of year 1 is $5,760 (right-hand column of the illustration); if the client needed or wanted to begin GLIB income immediately at contract issue, then GLIB income would be equal to 5.76% of their premium, again, guaranteed for life!
This concept is illustrative of both the emotional and the practical benefit of the GLIB. It provides the client with the emotional benefit of income security, and the practical benefit of predictable, reliable, and sustainable income.