Administration

Guaranteed Lifetime Withdrawal Has Benefits, Risks

By PLANSPONSOR staff editors@plansponsor.com | January 09, 2013
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January 9, 2013 (PLANSPONSOR.com) - Benefits, risks and regulation that varies from state to state can make choosing annuities with guaranteed lifetime withdrawals tricky for older Americans.

While annuities with guaranteed lifetime withdrawals can help older Americans ensure they do not outlive their assets, they do present some risk to consumers, the Government Accountability Office (GAO) said in a report.

Two such products—variable annuities with guaranteed lifetime withdrawal benefits (VA/GLWB) and contingent deferred annuities (CDAs)—share a number of features but have some key structural differences. Both annuities provide access to investment assets and the guarantee of lifetime income, but while VA/GLWB assets are held in a separate account of the insurer for the benefit of the annuity purchaser, the assets covered by a CDA are generally held in an investment account owned by the CDA purchaser, the GAO said.

According to industry participants, while annuities with GLWBs have been sold for a number of years, CDAs are relatively new and are not widely available. The GAO was asked to review issues relating to these financial products.

One benefit of these products is a steady stream of income regardless of how the investment assets perform or how long the consumer lives. At the same time, the consumer maintains access to their assets for unexpected or other expenses. VA/GLWBs and CDAs are complex products that present some risks to consumers and require them to make multiple important decisions.

For example, consumers might purchase an unsuitable product or make withdrawal decisions that could negatively affect their potential benefits. The GAO spoke to several insurers and regulators that said it was important for consumers to obtain professional financial advice before purchasing these products. These products can also create risks for insurers that, if not addressed, could ultimately affect insurers’ ability to provide promised benefits to consumers.

VA/GLWBs are considered to be both securities and insurance products, and are therefore covered by both federal securities regulations and state insurance regulations.