Beware of Variable Annuity GMIB Riders
Guaranteed Minimum Income Benefit (GMIB) are one of the ways that variable annuities are being sold. Unfortunately, I have yet to meet a single person who understood what they bought when GMIBs are involved.
The bold print talks about guaranteed 5% annual growth in the income base no matter the underlying performance. And the charge for this guarantee typically runs from .5% to .6% of the income base.
What are people not understanding? Here are three things in increasing importance. The first is that the .5% rider charge is against the guaranteed income base, so if the annuity value goes down, the fee percentage can get significantly higher than .5%. Second, to make use of the guarantee the person must annuitize the contract. While I’ve found many clients who weren’t aware of these facts, I’ve also met those who were.
But now we come to the third item with which I have yet to find a single buyer of an annuity who understood this aspect. When you annuitize the contract under the GMIB rider, it uses its own MUCH more conservative annuitization rates and possible age set backs which in effect eliminate most of the benefit of the 5% growth in the guarantee income base.
Here is a quick illustration from a Guardian product to help show what I’m talking about. I picked them because they were the first one that came up when I googled for GMIBs (I’m sure there are products better and worse out there).
Here is the glossy on the annuity
As you can see it is the typical 5% “guarantee” on growth of the income base (cost is 0.5% of income base). So let’s take a quick look at their illustration in the brochure. The illustration assumes a 65 year old man buys the annuity product with $100K. After 10 years the “guaranteed income base” is $162,889 (which is $100K * 1.05^10). So far so good. And then it states the Annuity Income Per Year would be $9831 (just under $820/mo) for that base.
Now let’s go to www.immediateannuities.com and get a quote for how much it would cost a 75 year old man (remember this is 10 years later) to get an annuity that pays $820/month. Amazingly this only costs $89,288.
So what does this mean? It means the guarantee is no where near as good as it is made to seem in the bold print. It means that for the guarantee to be useful, after ten years the actual balance would need to be below $89K (not $162K as most purchasers believe) or interest rates would have to be significantly lower than they are today.
This is why I say these products skate the edge of fraud. Everything is disclosed, but virtually no one understands how minimal the guarantee is and how expensive!