Guaranteed Lifetime Withdrawal Benefit (GLWB)

What Is a Guaranteed Lifetime Withdrawal Benefit (GLWB)?

A guaranteed lifetime withdrawal benefit (GLWB) is a rider to a variable annuity that provides a minimum payout level, even if market losses reduce the cash value of your contract. Most of these riders also allow you to make withdrawals from your cash value as needed. You typically pay for the GLWB rider with annual fees that can vary based on the issuer.

Understanding GLWBs

An annuity is a contract between the purchaser, called the “annuitant,” and the issuer, in which the annuitant makes a one-time payment or regular payments to the issuer. In exchange, the issuer makes periodic payments back to the annuitant for the remainder of their life or for a specific number of years.

If you buy a fixed annuity, the issuer simply pays a fixed interest rate on the money you’ve paid to it. However, with a variable annuity, you can invest in the market through subaccounts. This feature offers greater growth potential, but it also subjects you to potential losses. A GLWB is a way to mitigate that risk.

The GLWB rider ensures that you receive a minimum lifetime payment that essentially counteracts any losses in your subaccounts. Most issuers also allow you to make additional withdrawals from your cash value; however, these typically reduce the guaranteed withdrawal amount.

How GLWB Riders Work

Variable annuities have a cash value that’s equal to the premiums you have paid plus or minus any market returns. With a GLWB rider, however, the contract has a separate benefit base—sometimes called a “withdrawal base”—that is used to calculate lifetime withdrawals.

Once you elect to receive your income stream, this benefit base is used to determine the amount of your minimum guaranteed withdrawal. Depending on the terms of the contract and your age, a certain percentage is applied to the benefit base to determine your guaranteed annual payment. It is usually determined by your age at the start of annuitization. For example, if you are 65 when you make your first withdrawal, your contract might stipulate a 5% withdrawal rate, whereas if you start receiving payouts at 70, your stipulated rate might be higher, say 5.25%.

A key feature of GLWB riders is that your withdrawal amount is based on either the benefit base or the cash value, whichever is higher at the time you start receiving guaranteed payments. Say, for example, that you invested $50,000 in premiums and have a withdrawal rate of 5%, but your cash value is only $35,000 at the time you elect to annuitize, due to poor market performance. The issuer would take the higher of these two amounts, your benefit base of $50,000, to calculate the guaranteed minimum withdrawals. This means you would receive $2,500 per year ($50,000 x 0.05 withdrawal rate).

GLWB riders may also allow you to make additional withdrawals from your cash value, even during the annuitization phase. However, doing so usually results in a reduction of your benefit base. For example, a withdrawal of 20% of your cash value would lead to a 20% decrease in the guaranteed minimum payments for the remainder of your life. In the example above, such a withdrawal would decrease the GLWB payment to $2,000 ($40,000 x 0.05 withdrawal rate).

Most insurance companies charge an annual fee for taking on the market risk that would ordinarily be borne by the customer. Those costs can vary widely, making it important to carefully review annuity documents before purchasing one.

Potential Features

Some GLWB riders come with additional benefits that can potentially increase the amount of your guaranteed withdrawal. The issuer may charge an additional fee or roll it into the fee for the rider itself. Among the more common examples are:

Minimum Rate of Return

The insurer may offer a minimum rate of return to your benefit base. The withdrawal amount is based on the higher of your benefit base (plus minimum return) or the cash value. Suppose, for example, that you paid $50,000 in premiums but had a guaranteed 4% rate of return, regardless of market conditions. In two years, that base would go up to $54,080 (add $2,000 after the first year, then $2,080 after the second year).

If the cash value remained at $50,000, the issuer would use the benefit base to calculate the lifetime payments. Assuming a 5% withdrawal percentage, you would receive annual payouts of $2,704 ($54,080 x 0.05 withdrawal rate).

Step-Up Feature

If the rider has a step-up feature, the insurer will periodically compare the current cash value in the account with the amount initially used to determine the GLWB. If the cash balance is higher, it will adjust the benefit accordingly.

Suppose, for instance, that the original withdrawal amount was based on a benefit base of $50,000, with a 5% withdrawal rate. That made the original guaranteed withdrawal $2,500 per year. However, if the cash balance five years later is now $60,000, the 5% withdrawal rate would be applied to that higher amount. Thus, going forward, you would receive $3,000 per year ($60,000 x 0.05 withdrawal rate).

Pros and Cons of a GLWB

The primary benefit of a GLWB rider is that it safeguards you from the possibility of receiving a lower lifetime payout if the market takes a hit. In addition, the rider allows you to access your cash value if you need it, which you cannot do with a traditional annuity, because it ties up the money you put into the contract once annuitization begins.

The downside, of course, is the additional cost of purchasing this protection. Those who start paying into the annuity well before they annuitize have a lower exposure to market risk as it is—that is, they have more time for the stocks and bonds in their subaccounts to recover. Therefore, customers with a longer time horizon may want to avoid the extra fee that comes with a GLWB rider.