In 2007, over 66% of all variable annuity sales included a Guaranteed Minimum Withdrawal Benefit (GMWB) feature.
GMWBs are a type of living benefit that allows variable insurance contract owners to receive a guaranteed amount of income regardless of the market performance of their account, provided that the owner limits annual withdrawals to a specified percentage. Generally, GMWBs guarantee either a total return of purchase payments, or lifetime withdrawals. GMWBs recently have proven popular with consumers faced with the combined retirement threats of reduced savings rates, longer expected longevity, and lower market performance.
As insurers compete for assets, insurers are offering GMWBs with more attractive features. Some GMWBs offer higher annual withdrawal limits (up to 7%) if the owner waits to a certain age to begin taking withdrawals. Other GMWBs promise a benefit base that will increase 10% per year until withdrawals begin. At the same time, insurers are hedging their risks by establishing investment limitations, required portfolio rebalancing, and penalties for excess withdrawals.
As the benefits and restrictions increase, so does the challenge of explaining these features to customers. Recently some industry commentators have suggested that the risks and benefits of GMWB features are not well understood by consumers, and that the features could be a future source of litigation or regulatory attention. In order to limit risks related to offering GMWBs, insurers should review their prospectus disclosure and sales materials and implement other steps in the sales process to ensure that the nuances of these features are adequately understood by those who buy and sell GMWBs.