By Linda Koco
In today’s market, guaranteed lifetime withdrawal benefit (GLWB) features are commonplace in variable annuities and in fixed index annuities, but much less so in fixed deferred annuities. That may start to change, however.
This month, New York Life debuted its Clear Income Fixed Annuity, a fixed deferred annuity with a built-in GLWB rider.
The design is so rare that it’s worth reiterating that the policy is not a variable annuity or a fixed index annuity. Neither is it an immediate income annuity or a deferred income annuity. It’s a “regular” fixed deferred annuity with a built-in GLWB rider.
Currently, there are only 11 fixed deferred annuities with GLWBs available for sale, according the Wink Inc. database. These policies are issued by only four carriers, one of them being New York Life, Wink president and CEO Sheryl J. Moore said in an interview.
The first time that Moore recalled seeing a fixed deferred annuity with GLWB was in 2005. But at that time, the GLWB story was mostly about variable annuities. The variable annuity products were the most popular form of guaranteed living benefit in the variable annuity marketplace, according to a Milliman report from the mid-2000s.
GLWB features later spread to fixed index annuity market, where they are now offered in 216 current products, according to Moore. The feature generally is elected on 60-70 percent of fixed index annuity sales, she added.
Meanwhile, traditional deferred annuities with GLWBs have received scant industry attention. Moore thinks the prolonged low interest rate environment has been a major contributing factor. The low rates already have slowed buyer interest in the traditional products, and the costs of adding a GLWB would further hamper attractiveness to consumers looking to grow assets.
Buyer preferences may be changing, however, at least among pre-retirees.
According to a New York Life press release, the carrier’s research found that today’s retirement-age consumers primarily want control of their money (76 percent), safety of principal (73 percent) and lifetime income payments from their retirement income products (55 percent).
As for growth of assets, these consumers ranked that preference in eighth place, the company said.
The research suggests that some clients have been staying on the sidelines, “waiting for an annuity that provides maximum flexibility, security and income in one product,” the carrier concluded.
No stranger to developing income annuity solutions such as deferred income annuities, New York Life decided to build its Clear Income Fixed Annuity around those attributes.
How does the GLWB work?
The GLWB feature in this fixed deferred annuity is much like other GLWBs in that it guarantees a stream of lifetime income payments even after all the accumulation value is exhausted by withdrawals. The withdrawal amount is calculated from the annuity’s “income base,” which is separate from the policy’s “accumulation value.”
But the target market is very specific: It is pre-retirees ages 55-65 who plan to retire within five to 10 years and who want an efficient way to generate a guaranteed income in retirement, according to the company.
In a product fact sheet, the insurer cautions customers that they should purchase the annuity only if they intend to receive payments under the rider. “The rider is only cancelable by the owner upon full surrender of the policy,” the fact sheet adds.
Even though the rider is built-in, it does have a cost. This is an annual fee of 0.75 percent of the accumulation value, deducted quarterly, Ross Goldstein, managing director at New York Life, said in an email. The fee ceases once the accumulation value is at zero.
“For most annuities with income benefits, it’s the income base (also known as the benefit base) that’s used to assess the fees,” said Goldstein. “But Clear Income is different because its fee is calculated using the accumulation value, generally leading to lower fees over time.”
The owner can begin taking income at any time after turning age 59½, and the withdrawal rate locks in at time of first payout. Once started, the income payouts continue for life.
The income base grows annually at a 5 percent compounded rate for up to 10 years or until lifetime withdrawals start, whichever occurs first. At each policy anniversary, if the accumulation value is higher than the income base, the income base resets to equal the accumulation value.
What happens to the GLWB payout if the policy owner decides to make withdrawals before income starts? The owner can take one “early access withdrawal” that will not interrupt the growth of the income base or lock in the guaranteed lifetime withdrawal rate, Goldstein said.
However, with any future withdrawals, he said, “the income base will be proportionally reduced, surrender charges and a market value adjustment may apply, and the annual increase (also known as the roll-up rate) will cease.” Also, any additional withdrawals taken at age 59½ or later will be treated as lifetime withdrawals.
The longer the client waits to receive income, the higher the future income will be, the company said. For example, a 55-year-old man buying a $100,000 annuity will receive $8,144 annually beginning at age 64, or, if he waits, $9,773 annually beginning at age 70.
Once income begins, what happens if the owner takes out more money than the stipulated GLWB amount? In that case, “all withdrawals taken in excess of the GLWB amount will result in a proportional reduction to the income base, and surrender charges and a market value adjustment may apply,” Goldstein said.
Sold through New York Life agents and select third party partners, Clear Income is available to issue ages 50-75, whether qualified or non-qualified, on either a single or joint-life basis. Minimum premium is $50,000 and additional premiums are not permitted. The policy is approved in all states except New York.
The initial interest crediting rate is guaranteed for the first seven years. A declining surrender charge also runs seven years. After that, the carrier sets a renewal rate annually, subject to a guaranteed minimum.
The contract has a return of premium after two years, and a guaranteed death benefit even after income payments have begun.
How does Clear Income differ from New York Life’s deferred income annuity? Both products can provide clients with a stream of guaranteed income that begins at a date in the future and lasts for life, said Goldstein. However, because it Clear Income provides more liquidity options, “it may be more appealing to some consumers. It also allows for greater flexibility when it comes to taking more or less of the income or choosing the income start date. With Clear Income, the policyholder can begin taking income payments at any time.”
AnnuityNews Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at email@example.com.
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