How do variable annuities with guaranteed living benefit riders work?

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AcadiFi · Accepted Answer

Variable annuities invest the premium in subaccounts (similar to mutual funds) inside an insurance wrapper. Living benefit riders add insurance guarantees on top. The two common flavors: GLWB (Guaranteed Lifetime Withdrawal Benefit) and GMIB (Guaranteed Minimum Income Benefit). GLWB allows withdrawing a fixed percentage (e.g., 5% of a 'benefit base') for life regardless of subaccount performance. The benefit base often steps up to market highs but never resets lower. If the subaccount crashes, withdrawals continue from insurer funds. GMIB promises a minimum guaranteed income at a future annuitization date, requiring the contract to be annuitized to unlock the benefit. ```mermaid flowchart LR P[Premium $200K] --> S[Subaccounts
equity + bond] P --> B[Benefit base] S --> W[Actual value] B --> G[Guaranteed 5% for life] ``` Total costs are high: M&E charge (1.0-1.4%), rider fee (1.0-1.5%), fund fees (0.7-1.0%), totaling 3-4% annually. CFA L3 evaluates VA GLWBs as a put option on longevity and equity markets combined. In strong markets, the investor captures upside through benefit base step-ups; in weak markets, the insurer pays the guaranteed income. Behavioral value is real — clients stay invested in equities because downside is capped. Analytical value depends on fees; break-even requires severe downside or extreme longevity. Better alternatives for many retirees: low-cost target-date fund plus small DIA, or maximized Social Security claiming. Recommend VA GLWBs selectively for risk-averse clients who would otherwise hold 100% bonds and need equity upside.

How do variable annuities with guaranteed living benefit riders work?

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