What Are Guaranteed Withdrawal Benefits and Lifetime Income Riders?

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DEFINITION

Guaranteed lifetime withdrawal benefit (GLWB) riders and lifetime income benefit riders (LIBR) are features offered with some variable annuity contracts. They guarantee an income for life.

Wallet 1 vs. Wallet 2

These income riders work by creating what we call "Wallet 1" and "Wallet 2." Wallet 1 is real money. If you "cash in" the annuity, that is what you get. 

"Wallet 2" is an accounting entry referred to as your "income base." It is not real money. It is an accounting method used to figure out the amount of guaranteed income you can withdraw if you trigger the rider. There is often a withdrawal percentage that is tied to your age.

For instance, the rider might say you can withdraw 4% of the greater of the actual contract value (Wallet 1) or the income base (Wallet 2) if you begin taking withdrawals between ages 60 and 64, 4.5% if you begin between ages 65 and 69, and 5% if you begin taking income at age 70 or later.

Wallet 2 is used to provide a minimum known outcome. Still, if the investments do better than the guarantees provided by Wallet 2, then your income could be greater than the minimum amount.

Finding an Annuity with an Income Rider

They are some really great products out there, but as with any investment, do your homework first. When looking for a variable annuity that offers a GLWB rider or a LIBR, here’s what to look for:

  1. Know the terms of the rider. LIBRs may be referred to using different terms, and a LIBR is not the same as a GLWB.
  2. Low fees. The total fees you pay on an annual basis, including any fee paid to your advisor, should be 3% a year or less.
  3. No annuitization required. You want to find an income rider that does not require you to annuitize your contract in order to use it. That means you can withdraw a guaranteed amount each year (5% for instance), but if you need to, you could still access your principal. Note that doing so may reduce the amount of guaranteed income you could withdraw. It also means that upon your death, any funds that are left can still be passed along to heirs.
  4. An annual step-up that locks in your income base. This feature means that your future income can only go up, not down. Each year, on your contract anniversary, the annuity company takes a look at your account value. If it is higher than it was the year before, the new amount becomes your income base upon which the GLWB or LIBR is based. If the contract value is less than it was the year before, your income base remains as it was, so your income base cannot go down, only up.
  5. A company that has quality ratings. A guarantee is only as good as the company that issues it. In the past, insurance company guarantees have been something you can rely on. To be safe, be sure to buy from those that have quality ratings. For an added layer of safety, some people prefer to choose two or three quality insurance companies that offer policies with the features described above, and spread their money across them.

If you're looking for an annuity that has a guaranteed income feature, search AnnuityFYI, which keeps an updated list of competitive annuities that offer either a GLWB rider or an LIBR.

Related: Best Whole Life Insurance Policies