When looking into creating a retirement budget, you may have come across the term guaranteed minimum income benefit (GMIB). Some annuity providers offer this optional insurance rider to guarantee a lifetime income.
These providers often present the benefits of purchasing the rider without detailing how it works. As such, it’s important to understand GMIBs before deciding if it’s right for you. Here’s a closer look at what GMIBs are and how they work to help you make an informed decision when buying annuities.
What Are Guaranteed Minimum Income Benefits?
A guaranteed minimum income benefit is an optional insurance rider or add-on to an existing annuity. This rider may go by other industry terms, including Guaranteed Lifetime Income Rider (GLIR), Lifetime Income Benefit Rider (LIBR), and Guaranteed Minimum Withdrawal Benefit (GMWB).
Annuities are contracts involving fixed sums of money that the provider pays to someone each year. These payments typically begin at a later date (particularly during retirement) and last for the rest of the annuitant’s life. The annuity you purchase may have unique structures, terms, and rates.
Considering market volatility, annuitants can be understandably worried about their income once they annuitize or convert their annuity into cash. With a GMIB, they can secure payments without worrying about the unpredictability of market performances in the future. Accordingly, they obtain a “guaranteed minimum income” from their annuity.
How Do Guaranteed Minimum Income Benefits Work?
Annuitants can add a GMIB rider to their retirement annuities. This way, they will have two account values instead of one. The first account value will be the actual market value of the annuity. This value comes from the performance of any underlying mutual funds.
The second account value will be the GMIB account value. This account will only end up applying once the annuitant annuitizes their contract, which will involve calculating its value to determine their income for life.
A GMIB will have a guaranteed percentage that will become a credit to the account every year. This payout will continue until the annuitant becomes a certain age. At this point, the value of the GMIB account will be frozen.
Understanding Variable Annuities
Some annuitants may purchase a GMIB to supplement their variable annuity, which is a tax-deferred annuity that will change in value depending on the performance of its underlying portfolio, though it is not common. Changes in the underlying investments will affect a variable annuity and its value.
Once the annuitant annuitizes their variable annuity, the payments will change based on the market. This comes with risk because if the market declines, then the value of the variable annuity will fall.
Understanding Indexed Annuities
Most annuitants will add a GMIB rider to their indexed annuity policy. Also known as fixed-index or equity-indexed annuity, this type of annuity will have rates that depend on the performance of a specific index, including the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average.
Unlike variable annuities, indexed annuities guarantee no money loss. When the index is positive, then the annuitant will receive a certain amount of interest. This amount will depend on their participation rate.
Meanwhile, annuitants can still obtain a fixed return rate without losing their original principal, even if the market is plummeting when they decide to annuitize. Accordingly, it works hand-in-hand with a GMIB rider.
Pros and Cons of Guaranteed Minimum Income Benefit Riders
The general idea of GMIBs guaranteeing an income stream for retired investors is understandably appealing. However, it requires several considerations before anyone should decide to purchase the rider.
For instance, how much someone has to invest will determine whether purchasing a GMIB will make sense for their retirement fund. Meanwhile, someone might have an ideal sum that they hope to make during retirement, perhaps to sustain dependents or to maintain a business.
Furthermore, like any insurance policy, risk will be involved in calculating how much the holder can obtain. Thus, it is critical to weigh all advantages and the potential disadvantages when deciding whether a GMIB rider is ideal for a retirement plan. Consider these pros and cons.
Advantages of GMIBs
- Guaranteed Income: Securing a fixed amount of income during retirement is the primary benefit of purchasing a GMIB rider for any existing annuity policy. You never know what will happen to the future market and how it will affect your primary income stream when you choose to retire. Thus, the rider can help ensure annuity payments regardless of the market’s volatility.
- Portfolio Diversification: GMIB riders and annuities are investments that also depend on the annuitant’s other underlying investments. If their investments in other stocks and products face risks in their respective volatile market, they can rely on the income security that GMIBs offer people planning for their retirement.
- Secure a Spouse’s Income: Retiring spouses can also benefit from the income that the rider guarantees. Suppose an annuitant is married. They have a GMIB that they maintain payments for some years. However, they structured their policy so that their spouse will continue the payments when they pass away. Once the spouse takes over, the benefits will carry over to them. Thus, they can fund their retirement needs.
Disadvantages of GMIBs
- Added Costs: GMIB riders are add-ons. Thus, an annuity contract is going to cost more than it may already do if the annuitant adds more terms to their policy. Despite the guaranteed financial security that the rider offers, it may not be the most suitable retirement option for those with limited money to invest in their annuities. Annuitants may also want to consider the provisions of their existing policies before deciding to buy a GMIB.
- Availability: Some annuity providers may not offer GMIB riders. Thus, interested annuitants will need to seek third-party providers to supplement their policy. However, the two companies might have unique contract terms that will complicate matters, putting the annuitant’s retirement income security at risk. In addition, the quality of the annuity that one company offers may not be as good as the other. That volatility furthers the risk of the annuitant in guaranteeing an income stream during retirement. As such, it is critical to research the ratings of the different annuity companies and the products that they offer.
- Limited Benefits: With many different annuity providers offering different benefits, it can be challenging to choose the right one that fits an investor’s needs. Additionally, complex factors may come into play when an annuitant includes GMIB provisions in their annuity payments before they can enjoy the benefits. Once again, everything comes down to the specific terms that the annuity providers set down for their clients and how well they align with a potential investor’s retirement goals.
Features of a Good GMIB
When comparing GMIB riders from different providers, be sure to confirm that the benefits they offer align with your retirement goals. This way, you can confidently proceed with your decision to purchase the rider and supplement your annuity retirement income. Some features of good GMIB annuities include:
- Affordable Rider Fees: It’s essential to compare the fees that different riders cost. Although it is reasonable for companies to charge for their services, annuitants should assess their goals and the potential fees they will pay once they include a GMIB in their contract. They should get to enjoy the benefits without the rider fees devouring their returns.
- High Guaranteed Compounding Value: Compounding interest depends on market conditions, which experts can predict but never fully guarantee. Thus, the GMIB rider that one purchases must have a high guaranteed percentage (within their budget) to get peace of mind in obtaining a return on their investment over time. Flexible Distribution Provisions: Annuitants must consider the flexibility in the policies that different providers offer. Ideally, the investor should go for a policy plan that continues growing and compounding interest until they plan to retire. However, not all plans may follow through and will require adjustments. For example, the original policyholder could suddenly pass away and will need their survivors to take over the plan to enjoy its retirement benefits.
GMIB contracts are customizable according to an annuitant’s unique situation. Take this example for ideas about how the rider might work in your favor:
You purchased a $200,000 indexed annuity policy with a GMIB rider. Your compounding rate is 6% and your contract states that you will receive payouts in 10 years. However, during the accumulation phase, which is when you pay your investments, the index that your policy depends on did not perform well. You ended up with only 5% of the annual return.
Since you have a GMIB rider with your annuity policy, your payouts will depend on the 6% rate that you agreed upon. If you did not have the add-on, its basis would have been the 5% annual return on your base annuity. Though you still get a certain amount, you would not get the maximum you expected.
Suppose you purchased a GMIB rider that guaranteed an annuity payout based on the index’s highest value. If your investment account went beyond the 6% rate you signed on, you may obtain more than you expected from the beginning. However, certain conditions may apply, such as you can only receive payments if you outlive your investments.
Final Thoughts: Seek Professional Advice When Getting a GMIB
Guaranteed minimum income benefits are optional riders that an investor can include in their annuity policy, usually indexed annuities. These contract add-ons ensure that the annuitant obtains a set sum of money when they retire, regardless of the market’s performance during the accumulation period.
GMIBs offer several benefits but also come with disadvantages. However, they are customizable contracts that the annuitant can discuss with the provider to ensure they can enjoy and maximize their returns on investment. It is important to compare the available options and assess whether they align with an annuitant’s retirement goals.
If you want to learn more about how to protect your wealth for retirement, e offer comprehensive guides on the different annuities and which ones are most appropriate for specific plans, but it is important to speak with a licensed expert. At Safe Wealth Plan we can connect you with a licensed agent or financial advisor to help you weigh and understand your options.
.Whether you are planning for your retirement from scratch or want to update your existing plan to reflect whatever changes you are experiencing, we are standing by to discuss your options. Talk to us.