Guaranteed Lifetime Withdrawal Benefit (GLWB)

A Guaranteed Lifetime Withdrawal Benefit (GLWB) is an optional rider for a variable annuity that guarantees a minimum lifetime income regardless of market losses. It creates a separate benefit base used to calculate guaranteed withdrawals and typically carries an additional annual fee.

Key takeaways

• GLWBs protect against market declines by guaranteeing a minimum withdrawal amount for life.
• The guaranteed payment is based on a benefit (or withdrawal) base or the contract cash value—whichever is higher when lifetime withdrawals begin.
• Riders often include features like step-ups or minimum crediting rates but come with extra costs that vary by issuer.

How a GLWB works

• You buy a variable annuity and add a GLWB rider (usually for an extra annual fee).
• The annuity has a cash value tied to subaccount investment performance; the rider establishes a separate benefit base used only to calculate guaranteed withdrawals.
• When you begin lifetime withdrawals, the insurer applies a withdrawal percentage (often linked to your age at start) to the benefit base to determine the guaranteed annual payout.
• The guarantee pays based on the higher of the benefit base or the cash value at election. Additional withdrawals from the cash value are usually allowed but typically reduce the benefit base and future guaranteed payments.

Example:
* Premiums paid: $50,000 (benefit base)
Cash value at start of withdrawals: $35,000 (market decline)
Withdrawal rate: 5%
* Guaranteed annual payment: $50,000 × 5% = $2,500 (because the benefit base is higher)

Partial-withdrawal impact:
* If you withdraw 20% of cash value and the rider requires proportional reduction, the benefit base and subsequent guaranteed payments may be reduced 20%.

Common GLWB features

• Minimum rate of return: The benefit base may be credited with a guaranteed growth rate (e.g., 3–5% annually) regardless of market performance.
• Step-up (ratchet): Periodic comparisons of cash value and benefit base allow the insurer to increase the benefit base if the cash value is higher, raising future guaranteed withdrawals.
• Age-based withdrawal rates: Older annuitants typically qualify for higher withdrawal percentages when they start benefits.

Fees and trade-offs

• GLWB riders involve additional fees (often a percentage of the account value or benefit base) to compensate the insurer for the risk. Fees vary widely—read contract terms closely.
• The protection reduces downside risk but can be costly, especially if you have a long horizon for recovery in the underlying subaccounts.
• Making withdrawals above the guaranteed amount or taking loans/penalty-free distributions may reduce or forfeit the guarantee.

Pros and cons

Pros
* Lifetime income floor despite market downturns.
Flexibility to access cash value (subject to rider terms).
Potential to lock in gains via step-ups or credited minimum returns.

Cons
* Additional ongoing fees that reduce investment returns.
Complex contract terms—surrender charges, withdrawal limits, and reductions can be confusing.
May be less attractive for investors with long time horizons who can tolerate market volatility.

When to consider a GLWB

• You want a guaranteed income floor but also want exposure to market growth.
• You prefer access to cash value rather than fully annuitizing principal.
• You are concerned about sequence-of-returns risk in retirement and are willing to pay for downside protection.

Frequently asked questions

What is a step-up feature?
A step-up (or ratchet) periodically replaces the benefit base with the current cash value if the cash value is higher, increasing future guaranteed withdrawals.

What are the main downsides?
The main downside is cost—annual rider fees can materially reduce net returns. Also, contract complexity and withdrawal restrictions can limit flexibility.

Do withdrawals reduce the guarantee?
Yes. Withdrawals above the allowed guaranteed amount or certain partial withdrawals typically reduce the benefit base and lower future guaranteed payments.

Bottom line

A GLWB can provide valuable lifetime income protection within a variable annuity, combining downside protection with upside participation. However, the benefits come at a cost and under complex contract rules. Evaluate fees, withdrawal rules, surrender charges, and how the benefit base is calculated before adding a GLWB.