Understanding Index Annuity GLWBs

Another important principle to understand is that every GLWB on the market has a cost. Despite the fact that an insurance carrier or marketing organization may tout their benefit as "no cost," a charge has been priced into the product in some manner.

For instance, should the consumer elect the GLWB rider, many such features permanently reduce the caps, reduce the participation rates/fixed rates, and increase the spreads. People need to ask themselves about the impact of such a charge. What if the carrier decides to reduce renewal rates on the contract? The consumer's gains will be reduced even further by a reduction to cover the GLWB.

A suggestion for advisors: If this is the right type of GLWB for a client, make certain that you do not indicate that it is "free." It isn't free. The customer will definitely be paying for it through lower gains on the contract.

The most common way that GLWBs are paid for is through an explicit account value charge which is regularly deducted from the contract (these charges range from 0.10% to 0.50% annually today).

An important question to ask when evaluating such a charge is, "can this charge invade the principal of the contract?" Astoundingly, the answer is a resounding "yes" for 70% of these benefits today.

This means that one can no longer market the fact that the index annuity's account value will not decline in the event of a down market, if such a rider is attached. These charges are still deducted even if there are no gains credited to the contract. Yes, zero is the hero, but not on all index annuities with an explicit account value charge for their GLWBs.

Finally, advisors should remember that each company offering a GLWB has its own names for these features, and even the benefits themselves.

Because GLWBs are becoming increasingly competitive, it is in the advisor's best interest to analyze the market, to assure that the benefit being offered is the right one for the client.

More importantly, advisors need to be certain that they understand the features of their favorite GLWBs, so that they can properly present the features to clients.