What clients need to know about guaranteed lifetime withdrawal benefits

For retirees, the fear of losing a portion of their retirement savings is very real. Every investor would love a guaranteed return to help secure their future. 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 may be appealing to clients approaching retirement because, as the name implies, the rider insures the investment and helps minimize risk.

To cautious investors, the thought of guaranteed income for life no matter how long they live sounds ideal. And, for many, it may be. 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.

For all their benefits, it’s important to note that GLWBs may have some downsides, too. As is true for any investment, they may not be in everyone’s best interest. So what do you do when a client insists on a GLWB without considering its hidden drawbacks and other, potentially more viable strategies?

The key is to arm clients with facts so they can make a fully informed decision about their financial futures. Putting aside confusing financial jargon, here are some talking points to cover with them using language they can understand.

5 reasons why a GLWB may not be the best answer for cautious investors

1. Fees

Guarantees come at a cost. There may be a fee on top of any other expenses for contract and mutual funds. In addition, if a client changes their mind, there will likely be hefty surrender charges. Taking fees, expenses and surrender penalties into account, an investment would need to perform exceptionally well to surpass the likely returns on a similarly allocated passive account. This underscores the importance of ensuring clients are fully informed so there’s less likelihood of changing their minds down the road.

Some products do not have explicit fees. Instead, they’re built into the product, and surrender fees may diminish over time and eventually be waived. Likewise, most annuities have exceptions for health hardship withdrawals stemming from nursing home confinement or terminal illness, allowing access to the full value of a contract without surrender charges.

2. Limits

Financial professionals need to inform clients that only their annual income is guaranteed, not the variable annuity’s actual account balance. So, if your client chooses to cash out the account, they 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” may be a misconception.

3. Activation

Many of those who’ve paid for an annuity rider may not know how to leverage the benefit or activate the feature. Conversely, some policyholders begin withdrawals even though their contracts are underwater. Guiding clients on how to take full advantage of their annuity benefits is critical to avoid these missteps.

4. Withdrawals

Typically, when investors begin withdrawing from a GLWB, they pull 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, some may only withdraw their own money and never actually benefit from the policy. In addition, the cost of the withdrawal benefit may be increased by the insurance company that issued the rider, resulting in reduced income.

5. Inflation

The average median income from these accounts may not keep pace with inflation. Help your clients find a balance by weighing the risks of inflation in comparison to the risks of outliving their savings.

With global uncertainties and market volatility, some investors may be convinced that a variable annuity with a guaranteed lifetime withdrawal benefit rider will offer the stability they long for. It might do just that. Or, it might not. As a financial professional, you can help them thoroughly understand the potential benefits and drawbacks and guide them to make the wisest decisions about their retirement investments.

It’s also important to note that numerous companies offer annuity products touting guaranteed income in retirement, and each will structure their products and features differently. Not all GLWBs are the same, and it’s worth the time to explore the options before dismissing or recommending one or the other.

If you and your client determine that a GLWB is the right move, consider recommending the TruStage™ Zone Income Annuity, underwritten by MEMBERS Life Insurance Company, which allows them to set a “comfort zone” with a guaranteed floor on their index strategy. They can choose to adjust their comfort zone annually to reflect shifting risk tolerances. It also offers double-digit upside growth potential and locks in a minimum income stream to the policyholder for life, while helping to provide a measure of downside protection. Reach out to your wholesaler for more information. Need to get appointed? Get started.