Definition:
Guaranteed lifetime withdrawal benefits (GLWB) and lifetime income riders (LIBR) are features offered with some variable insurance contracts. These features guarantee a lifetime income.
Portfolio 1 vs Portfolio 2
These features work by creating what we call “Portfolio 1” and “Portfolio 2”. Portfolio 1 is the real money. If you “withdraw” from the insurance, this is what you get.
Portfolio 2 is an accounting entry referred to as the “income base”. It is not real money. It is an accounting method used to determine the amount of guaranteed income you can withdraw if you activate the feature. There is often a withdrawal percentage tied to your age.
For example, the rider may state that you can withdraw 4% of the actual value of the contract (Portfolio 1) or the income base (Portfolio 2) if you start withdrawing money between ages 60 and 64, 4.5% if you start between ages 65 and 69, and 5% if you start withdrawing income at age 70 or later.
Portfolio 2 is used to provide a known minimum outcome. However, if investments perform better than the guarantees provided by Portfolio 2, your income may exceed the minimum.
Finding Insurance with an Income Rider
There are some great products available, but as with any investment, do your necessary research first. When looking for variable insurance that offers a GLWB or LIBR rider, here’s what to look for:
- Understand the rider’s terms. LIBRs may be referred to using different terminology, and LIBR is not the same as GLWB.
- Low fees. Your total fees should be 3% annually or less, including any fees you pay to your advisor.
- No requirement to annuitize. You want to find an income rider that doesn’t require you to annuitize the contract to use it. This means you can withdraw a guaranteed amount each year (e.g., 5%), but if you need to, you can still access your principal. It should be noted that doing so may reduce the amount of guaranteed income you can withdraw. It also means that upon your death, any remaining funds can be passed on to heirs.
- Annual increases that lock in your income base. This feature means that your future income can only go up, not down. Each year, on your contract anniversary, the insurance company looks at your account value. If it’s higher than the previous year, the new amount becomes your income base upon which the GLWB or LIBR is based. If the contract value is lower than it was the previous year, your income base remains the same, so your income base cannot go down, only up.
- A company with quality ratings. The guarantee is only as good as the company that issues it. In the past, insurance company guarantees were something you could rely on. To ensure safety, make sure to purchase from companies that have quality ratings. For an extra layer of safety, some people prefer to choose two or three quality insurance companies that offer policies containing the features mentioned above and spread their money across them.
If you are looking for insurance that includes a guaranteed income feature, you can check AnnuityFYI, where a current list of competitive annuities offering either a GLWB or LIBR rider is maintained.
Conclusion
Ultimately, guaranteed withdrawal benefits and lifetime income riders are important features offered by some variable insurance contracts. These features provide guaranteed lifetime income and allow investors to benefit from investments without sacrificing access to the original capital. However, investors should be cautious and conduct the necessary research before investing in these contracts and ensure they meet their financial needs and goals.
Source:
https://www.thebalancemoney.com/what-are-guaranteed-withdrawal-benefits-2389040
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