Are Fixed Annuity GLWBs Needed?

GLWBs were first offered on variable annuities. The story here is the same one mentioned above with one important addition: a variable annuity GLWB protects the income from stock market risk of loss that could severely lessen the income.

From a purely rational economic look, using a GLWB with a VA can be justified–because there is a distinct possibility that, due to market losses, the annuity's owner could run out of money before death.

However, fixed annuities are not subject to stock market risk of loss and they even guarantee a minimum return. This is what raises the question about the need for the feature in a fixed annuity.

Let's say the customer earns a 2% minimum guaranteed return. If age 65 and taking 5% in payouts, or if age 75 and receiving 6%, the payouts will last into the customer's 90s. This is a lot longer than life expectancy for most people (2002 U.S. Life Tables). What's more, if the customer can find a minimum guaranteed rate of 3%, the above payouts flirt with the centennial mark.

Because of these minimum guarantees, and the certainty that credited gains can never be lost, the odds of the "G" in the GLWB kicking in is pretty small.

This does not mean the benefit isn't worthwhile. From a consumer economic behavioral aspect, a fixed annuity GLWB is very attractive because it helps remove a significant fear–the fear of outliving one's money.

Even though the odds are low that this could happen with the fixed annuity payouts used, it can still happen. The GLWB provides insurance that covers this risk at a relatively low cost.