Living benefits are essential in the marketing of annuity products as income and retirement solutions. Different versions have become available over the last decade, including the Guaranteed Minimum Accumulation Benefit (GMAB), the Guaranteed Minimum Income Benefit (GMIB) and the Guaranteed Payout Annuity Floor (GPAF). All are designed to provide protection against poor market performance.

Definition of terms mentioned in this document are described in the Living Benefits Glossary of Terms.

GMWB / GLWB
The newest generation of living benefit is known as the Guaranteed Minimum Withdrawal Benefit, or GMWB. This benefit ensures that a contract owner or annuitant will receive a guaranteed stream of income payments, regardless of the contract account value. Payments can be guaranteed for a specified period or for the lifetime of the contract owner or annuitant.

The lifetime version of this benefit has recently become more popular, and is commonly referred to as the Guaranteed Lifetime Withdrawal Benefit, or GLWB. These features can be attached to variable and fixed annuities as optional riders or built directly into the product chassis. They may be required at issue or may be available to be added after issue to existing contracts.

GMWB / GLWB ensures that one's investment in an annuity contract will not be lost due to poor market performance while at the same time rewarding positive investment experience. The idea is to ensure that one will not outlive his or her income. While the contract is active, the owner has complete access to the account value if needed. This flexibility is seen as more attractive than traditional annuity payout options, which restrict access to the account value when the contract is annuitized and payments commence.

The lifetime of the typical GMWB rider can be defined by several phases: inactice, deferral, benefits, and withdrawal.

Inactive Phase
During the inactive phase, the rider is present on the contract, but contract activity is not being tracked for GMWB purposes, the rider is not incurring additional charges and guarantees have not been set. This phase is typically intended to represent that the GMWB rider will be available at some point in the future, but the owner is not currently eligible.

Deferral Phase
Once the owner becomes eligible (i.e., the minimum issue age has been reached), the rider might define a deferral phase. Some products do not define a deferral phase. During this phase, the contract benefit base is accumulated.

There are several methods of determining the benefit base. At its simplest, benefit base represents the total of premium payments received. Accumulated premium payments can grow with interest, which is known as premium roll-up. The benefit base can be compared to contract account value on anniversary and reset if the account value is higher. This is known as account value step-up. A bonus can be calculated and applied to the benefit base in years in which no withdrawals have been taken. Any or all of these methods can be used together to determine the benefit base.

An additional charge is typically defined with the GMWB rider, which can be defined as a percentage of account value, benefit base or some other value and deducted periodically, or can be included in the mortality and expense factor that is used to determine unit prices. A separate value may be used to track the remaining amount of the benefit base that has not yet been withdrawn. This amount may be available as a death benefit in the event of the death of the owner or annuitant.

Benefit Phase
The benefit base represents the basis for the calculation of the guaranteed withdrawal amount (GWA), which is the amount that can be withdrawn each contract year once the withdrawal phase is initiated and benefit guarantees are locked in.

The GWA is determined by multiplying the benefit base by the appropriate distribution factor. Distribution factors can be defined to vary by age, and can remain level throughout the withdrawal phase or can be set to (generally) increase as the owner ages. The distribution factor can be defined as a weighted-average distribution factor, which is a blended rate determined by the age of each payment.

Generally, the longer a contract remains in the deferral phase, the higher the distribution factor will be once the withdrawal phase is initiated. Thus, waiting to initiate the withdrawal phase is encouraged. Some products do not define a deferral phase. These products are automatically placed in the withdrawal phase upon issue. Guarantees are set immediately. Additional premium payments may or may not be allowed once the withdrawal phase is initiated.

Withdrawal Phase
Annual withdrawals up to and including the GWA generally will not cause GWA to be recalculated. These withdrawals can be guaranteed for the life of the owner or annuitant (lifetime GWA) or for a specified period (term GWA), depending on the product design.

The rider can be defined such that withdrawals up to the GWA are excluded from surrender charge calculations. When a withdrawal is processed that exceeds the GWA, it is referred to as an excess withdrawal, or a non-guaranteed withdrawal. Excess withdrawals are typically discouraged by calculating a proportional reduction to the benefit base and redetermining a lower GWA.

Generally, GMWB riders are considered RMD-friendly. If a withdrawal is taken pursuant to required minimum distribution (RMD) regulations that exceeds the GWA, it is not considered excess and the owner will not be penalized with a lower GWA.

Guranteed Payment Phase
The GMWB rider guarantees that the annual GWA will be available for withdrawal, even if the contract runs out of account value. When all account value is exhausted and guaranteed payments remain, the contract enters the guaranteed payment phase.

During the guaranteed payment phase, excess withdrawals are prohibited and contract charges are waived. Other riders that may exist on the contract (e.g., guaranteed minimum death benefits) are terminated. A systematic withdrawal program might be initiated to guarantee that the GWA is disbursed to the owner / annuitant.

Withdrawals will be considered non-taxable to the extent of any remaining cost basis, at which point they will be considered taxable and subject to withholding. The withdrawal amounts, including any tax withholding, are written off to a company expense account. No other contract activity is typically allowed during the guaranteed payment phase.