For retirees, the fear of losing any portion of their retirement savings is very real. Everyone in the market would love a guarantee on their return. Unfortunately, there are few guarantees when it comes to investing, especially when factoring in market turbulence, a fluctuating economy and meager interest rates. Annuities with a guaranteed lifetime withdrawal benefit (GLWB) rider can be appealing to clients approaching retirement because, as the name implies, the rider insures the investment and minimizes risk.
To a cautious investor, the thought of guaranteed income for life no matter how long he/she lives sounds ideal. At first glance, it may seem like a no-brainer. For a fee, a client can be assured of a minimum return over time, and even if the cash value doesn’t grow, there would still be a guaranteed income to rely upon. Sounds great, right?
But GLWBs have their disadvantages and are not in everyone’s best interest. So what do you do when a client insists on a GLWB without considering its hidden drawbacks and other, more viable, strategies? The key is to arm them with the facts so they can make a fully informed decision about their financial future. Putting aside confusing financial jargon, here are some points to cover with your clients using language they can clearly understand.
5 Reasons Why a GLWB May Not be the Best Answer for Cautious Investors
Fees. The riders don’t come cheap. There can be a fee on top of any other expenses for contract and mutual funds. In addition, if a client changes his/her mind, there will likely be hefty surrender charges. Taking the fees and other limitations into account, an investment would need to perform exceptionally well to surpass the likely returns on a similarly allocated passive account. Some products do not have explicit fees, but they are built within the product.
Limits. Advisors need to teach clients that only their annual income is guaranteed, not the variable annuity’s actual account balance. What this means is that if your client chooses to cash out the account, he/she would only receive the market value of the account, not the principal value. Some insurers also limit the investment amount to about half of a portfolio, so the notion of an investor’s entire portfolio being “safe” is a misconception.
Activation. Many of those who’ve paid for an annuity rider don’t know how to leverage the benefit and never actually activate the feature. Conversely, some policyholders begin withdrawals even though their contracts are under water.
Withdrawals. Typically, when an investor begins withdrawing from a GLWB, he/she is pulling from their own cash value. The time it takes to work through the cash value is usually longer than a person’s life expectancy. In the end, many simply withdraw from the investor’s own money and never actually benefit from the policy. In addition, the cost of the withdrawal benefit can be increased by the insurance company that issued the rider, resulting in reduced income.
Inflation. The average median income from these accounts does not keep pace with inflation.
Plagued with memories of the global financial crisis of 2007-08, some investors stand convinced that a variable annuity with a guaranteed lifetime withdrawal benefit rider will offer the stability they long for. As an advisor, you can help them thoroughly understand any drawbacks and guide them to make the wisest decisions about their retirement investments. An informed investor is a confident investor.
Review an announcement of the new Zone Income™ Annuity and see how its GLWB feature is being promoted — “locking in a minimum income stream to the policyholder for life.”