What Is a Guaranteed Lifetime Withdrawal Benefit?

A Guaranteed Lifetime Withdrawal Benefit (GLWB) is an optional rider attached to an annuity contract, designed to provide a predictable income stream for life. This benefit aims to offer financial security, ensuring that individuals receive regular payments regardless of how market fluctuations impact their underlying annuity’s value. The GLWB addresses concerns about outliving savings by guaranteeing income for as long as the policyholder lives.

Understanding the Benefit Base

The “benefit base” is a hypothetical value that an insurance company uses solely to calculate the guaranteed income stream provided by a GLWB. It is distinct from the annuity’s actual cash value, which is available for withdrawal or surrender. The benefit base starts with the initial premium paid into the annuity.

This base can grow over time through various mechanisms, even if the actual cash value of the annuity declines due to market performance. Some GLWB riders offer a “step-up” feature, which allows the benefit base to increase to the annuity’s higher cash value on specific contract anniversaries. Another common feature is a “roll-up” or guaranteed growth rate, where the benefit base increases by a fixed percentage annually, often between 5% and 7%, as long as withdrawals have not yet begun. Once withdrawals commence, the benefit base might be proportionally reduced if withdrawals exceed the allowed guaranteed amount, impacting future income calculations.

Calculating Lifetime Withdrawals

The actual amount of guaranteed lifetime income is determined by applying a specific “withdrawal percentage” or “payout rate” to the benefit base. This percentage is fixed when withdrawals begin and often varies by the annuitant’s age, with older ages corresponding to higher payout rates. For example, a 60-year-old might have a 5% withdrawal percentage, while an 80-year-old might receive 8%.

If an individual has a benefit base of $100,000 and a withdrawal percentage of 5%, the annual guaranteed income would be $5,000. These annual withdrawals are guaranteed for the annuitant’s entire life, even if the annuity’s underlying cash value eventually depletes to zero.

Market Impact and Withdrawal Sustainability

A GLWB provides income stability that is largely independent of market fluctuations. The guaranteed withdrawal amount remains consistent even if the underlying investments within the annuity perform poorly, causing the actual cash value to decrease significantly or become depleted.

However, exceeding the specified annual guaranteed withdrawal amount, known as an “over-withdrawal,” can have consequences for the benefit. Taking out more than the permitted amount can lead to a proportional reduction in the benefit base, which in turn lowers future guaranteed withdrawal amounts. In some cases, repeated or substantial over-withdrawals may even terminate the lifetime income guarantee entirely.

Associated Costs and Rider Features

GLWB riders are not included without charge; they incur an annual fee for the guarantee they provide. This fee is commonly expressed as a percentage of the benefit base or, in some cases, the annuity’s cash value. Annual costs for a GLWB rider range from 0.5% to 1.5% of the benefit base or cash value. These fees are deducted directly from the annuity’s cash value, which can affect the overall growth potential of the account.

Beyond the core income guarantee, GLWB riders often include additional features. A common provision is spousal continuation, which allows a surviving spouse to continue receiving the guaranteed income stream after the primary annuitant’s death, ensuring income for both lifetimes. Some riders may also incorporate death benefit provisions, where any remaining benefit base or cash value can be paid to beneficiaries.