It is called a guaranteed lifetime withdrawal benefit because you can make withdrawals that are guaranteed to last a lifetime. Since that’s mouthful, I’ll simply refer to it as a GLWB. The GLWB concept is simple. The annuity owner may choose to withdraw a specified percentage of the value of the annuity and the insurer guarantees that payout will be available for as long as the annuityowner lives, even if the annuity value goes to zero. Unlike annuitization where the annuity value is converted into an income, the annuity with a GLWB remains a deferred annuity, which means the annuity owner retains control and may stop the withdrawals at anytime and receive the current annuity value.
How does it work?
A GLWB might guarantee to pay out 5% of the annuity value each year for as long as we live. If the annuity interest earned is more than what is paid out the income is paid from the interest, but if the interest is less than 5% then the balance of the payment is made up out of the principal. What this means is the principal of the annuity could go down.
If you have a long period of low interest rates the cash value of the annuity will drop...possibly to zero. However, even if the value of the annuity drops to zero the insurer will keep paying the 5% as long as you live. That is the guarantee, the insurer will pay if you run out of money.
This sounds a lot like an income annuity doesn’t it? You get a guaranteed income for life with both the life income annuity and the GLWB. The difference is with an income annuity you are spending the principal to get the income. After you have purchased an income annuity, that’s it, you can’t change your mind.
With the GLWB you keep control of the principal so you can change your mind. Whether it’s one year down the road or ten you can decide to quit taking the guaranteed income for that one year or stop forever. You can do something else with the money if you wish, keeping in mind that we don’t know what the annuity cash value will be down the road. The lifetime guarantee is on the income, not the principal.
Actually you sometimes can know what the annuity cash value will be down the road. With the fixed annuity you will know the worse case scenario of how much principal is left after each future year in which you take the guaranteed withdrawals, but you don’t know how much better off you will be.
So, all annuities can provide an income. You can get an income guaranteed to last as long as you live, or as long as either you or your spouse lives, by using an income annuity or a deferred annuity with a guaranteed lifetime withdrawal benefit. You can also get an income from an annuity by taking withdrawals. And talking about withdrawals leads into the next questions people have about annuities.