The Election Is On!

Not only is the GLWB most likely to be available, it also has the highest rate of election. When examining election rates each quarter during 2007, the trend varied by GLB. Using a constant group of companies, election rates were largely flat for both GMAB and GMIB, while they decreased each quarter for GMWBs. Meanwhile, GLWB election rates increased modestly each quarter in 2007.

Election of GLBs is only the first in a series of behaviors related to the use of these benefits. The contract owner must keep the VA in force until benefit maturity for GMIBs and GMABs, and must actively take withdrawals for GLWBs/GMWBs or annuitize for GMIBs. In addition, many of the GLB benefit bases can be affected by step-up options, guaranteed growth if no withdrawals are taken, additional premiums or withdrawals prior to exercising the benefit at its maturity date.

Knowing more about actual withdrawals from VAs with GMWBs, annuitizations from VAs with GMIBs, and persistency for VAs with GMABs–as well as the intermediate behaviors involving step-ups and cash flow–is extremely helpful to insurers assessing and managing the long-terms risks of these benefits.

In its second-annual study of the utilization of GLBs, LIMRA addressed these issues. The results are based on over 1.6 million contracts that were either sold during, or in force as of, 2006. The discussion below focuses only on GLWB and GMWB utilization. (Note: insufficient information is available in the study on GMAB and GMIB utilization, because a majority of these riders had not reached benefit maturity.)

GLWBs. Among contract owners with GLWBs at the beginning of 2006, 23% took withdrawals during the year. The median amount withdrawn was 5% of beginning-of-year contract value, which coincides with the typical maximum annual withdrawal specified under the terms of the benefit.

It is not always possible to determine whether a partial withdrawal in a single year constitutes "utilization" of the GLWB. Therefore, the study also examined use of systematic withdrawals (a subset of all partial withdrawals) and multiple-year withdrawals. As it turns out, the vast majority of partial withdrawals in 2006 were classified as systematic (see Figure 2). And of those with withdrawal activity in 2005, 89% had withdrawal activity in 2006.

Older owners are much more likely to take withdrawals, especially systematic withdrawals, than younger owners. In part, this activity reflects required minimum distributions (RMDs) from IRAs after age 70 1/2 .

GMWBs. Compared to GLWBs, non-lifetime GMWBs were more likely to be utilized in 2006. This difference could reflect the incentives offered by many GLWBs that provide guaranteed growth if no withdrawals are taken. In addition, some owners may delay the onset of lifetime payouts in order to have a higher annual maximum withdrawal percentage.

Among contract owners with GMWBs at the beginning of 2006, 29% took withdrawals during the year. The median amount withdrawn was 6.5% of beginning-of-year contract value, slightly below the standard 7% maximum annual withdrawal amount.

The leading-edge of boomers is entering their early 60s. GLBs offer these individuals a safety net that enables them to stay in the equity market with its greater long-term returns while guarding against possible market downturns.

This positioning makes sense as people try to maximize their retirement nest egg in an increasingly short time frame, knowing that losses may be impossible to make up. Given this situation, it is a safe bet that GLBs will continue to be a major driver of VA sales in the years to come.

Joseph Montminy, ASA, MAAA, is associate research director-retirement research, and Matthew Drinkwater, Ph.D. is assistant managing director- retirement research, at LIMRA International, Windsor, Conn. Their respective e-mail addresses are [email protected] and [email protected]