More people who own variable annuities with a guaranteed lifetime withdrawal benefit (GLWB) rider are choosing to use that benefit for its intended purpose - providing an income stream in retirement - a new study has found.
Nearly a quarter of those who own VAs with the GLWB rider elected to withdraw income at the end of the first half of 2017. That's an increase of 2 percentage points over the last 18 months, the Ruark Consulting study found.
The study results offer a glimpse of policyholder behavior around GLWB riders, a feature of the variable annuity market that barely existed 13 years ago.
“People are using GLWBs more and more for the purposes they were intended, which is to provide an income stream in retirement” said actuary Timothy Paris, CEO of Ruark Consulting.
One reason for the increase in taking advantage of GLWB riders could be that advisors and annuity owners are more comfortable with how they work, Paris said.
Another could be that baby boomers are owning up to their longevity risk and sticking to their prearranged GLWB withdrawal windows and schedules.
Annuity owners who decline to make use of their GLWBs are considered to be “leaving money on the table,” as they forsake the income. Meanwhile, contract holders who withdraw more than the rider allows erode their future benefits or risk outliving the variable annuity’s lifetime income stream.
In some cases, people prefer not to take money out because they don’t need to or because they prefer to maintain the death benefit available to their beneficiaries, Paris said.
The value of all GLWBs amount to hundreds of billions of dollars.
Ruark Consulting tracks policyholder behavior based on data from 25 variable annuity companies with $905 billion in variable annuity account values.
10-Year Mark a Turning Point
Like Social Security, where retirees receive a higher monthly payout for every year they wait past age 62, annuity companies commonly offer incentives to defer withdrawals under GLWBs, sometimes for 10 years or more after purchase.
The amount of monthly income provided depends on when the annuity owners start taking that income.
Only 12 percent of those who own a VA with a GLWB elect to turn on their income in the first year they own their rider. The percentage of people turning on their income spigot drops even further after that.
However, recently emerging experience indicates higher GLWB income usage after 10 years. This higher usage after the decade-mark reflects the incentives to defer withdrawals.
“We’re at a point now when the first generation of GLWBs has recently hit the 10-year mark,” Paris said. “Five years ago, we didn’t have the data and now we have GLWB volume that is 10 years old and we see an increase in ‘efficient’ withdrawals after 10 years.”
Surrender Rates in First Half Revert to Norm
After a dip in 2016, the rate at which policyholders turned in – or surrendered – their variable annuity contracts rose again in the first half of 2017, the study found.
Surrender levels have returned to levels seen in 2010-2015, leading Paris to conclude that 2016 was an outlier in terms of surrender habits.
Lower surrender rates in 2016 could have been due to the uncertainty surrounding the Department of Labor fiduciary rule, which could make variable annuities more difficult for advisors to sell, he said.
Economic uncertainty related to the 2016 presidential election also could have played a role in owners hanging on to their variable annuities, Paris said.
Those who own variable annuities a lifetime benefit rider are less likely to turn in their annuities than owners whose contracts have other types of guarantees, Paris said.
Owners who have taken withdrawals no more than the rider’s maximum also have the lowest surrender rates, he said.
Tracking policyholder behavior matters to annuity companies as they develop new products and set pricing assumptions for them, Paris said.
Insurers also need to know how much money they must set aside in reserves and capital for in-force contracts.