Variable Annuities and the Guaranteed Minimum Payment Rider
People invest in variable annuities for many reasons including the tax-deferral of earnings, the ability to name beneficiaries and avoid probate, the growth potential of the managed sub-accounts and potentially the death benefit.
Then whenever they are ready to withdraw an income from their annuity, they have the opportunity to select lifetime income payments. However, with a variable annuity you do not know what that income will be when you open the account since the future value can vary depending on the investment’s performance. Sometimes though, investors overlook an important option that may help them plan for a predictable income.
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The Guaranteed Minimum Payment (GMP) option assures that you will receive no less than a specific amount of income each month, no matter what the markets do. And if the investments go up, your future monthly income goes up too.
How the GMP is determined varies among annuity companies. One example is to base it on the greater of:
• The value of your purchase compounded at 6% a year, or
• The highest account balance reached on any contract anniversary date
Another version of the GMP promises that future payouts will never be less than a certain percentage, say 80%, of your first payment. For instance if your first check is for $1,000, future distributions will be no less than $800, regardless of what happens to the markets and the value of your sub accounts.
The trade-off for this GMP rider is the extra cost. These costs can range from .1 to .5% of your annuity value ($100 to $500 annually on a $100,000 variable annuity). So you must read the prospectus to see what you pay for this benefit. And ask the retirement consultant you use to compare different companies for you or based on what comparison did he decide on recommending a particular annuity (If it becomes obvious he has not done any comparisons, go elsewhere. Better yet, ask him what he thought of Professor Moshe Milevsky’s paper on this issue and if he is unfamiliar, you’re dealing with a salesperson, not a professional).
recommended: http://econpapers.repec.org/article/eeeinsuma/v_3A38_3Ay_3A2006_3Ai_3A1_3Ap_3A21-38.htm
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Tags: gmp, guaranteed minimum payment, guaranteed minimum payout
January 16th, 2009 at 12:58 am
[...] Variable Annuities and the Guaranteed Minimum Payment Rider … [...]
March 5th, 2009 at 5:25 pm
Many Fixed Indexed Annuities have income benefit riders that will guarantee a rate of return such as 8% to be taken out as income at a later date.
May 3rd, 2009 at 6:05 am
It sounds like a good idea but you should look at what the intrest rate or yiled would be with the extra cost. I wonder if they have annuties that are insured that no matter what happend in the market or to the company that you bought the annutie you would still get paid.
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July 14th, 2009 at 8:24 pm
I prefer fixed rate annuities that guarantee a fixed rate of return as most of my clients are looking at annuities for their safety and are looking to take as much risk out but not get killed by fees.
September 21st, 2009 at 3:41 pm
Talk to an expert on annuities or structured settlements depending on your situation.
October 13th, 2009 at 12:52 am
How can one exactly make the most out of annuities? I hope you post a guide on the list of authorized people to get help from for this kind of issue.
October 20th, 2009 at 4:19 pm
As Bill mentions above, fixed rate annuities may be a good option for people in certain situations. Of course one should always consult with a professional individual or company that has knowledge and experience with annuities in order to give sound advice.
November 22nd, 2009 at 7:07 am
So from this article it seems that the fixed rate annuities are the safest bet to take then.
January 4th, 2010 at 3:52 pm
It is amazing how many of our customers are not familiar with this piece of info “You can pass its tax-deferred earnings advantage to your annuity beneficiary and supply her income over much of her life.”
Great info!
January 16th, 2010 at 12:16 pm
As a NY Divorce Attorney I don’t hold myself out to be an expert in Fixed Annuities, but I have worked for an investment firm in NYC in the past. I agree that one should always consult a retirement expert before making any major move in retirement investment strategy. That’s one reason I love this blog. Thanks for all your contributions…
February 1st, 2010 at 5:48 am
If you want more freedom with which to invest your money, you can choose a variable or index annuity. A variable allows you to invest in stocks, bonds etc. Nice Post.
February 25th, 2010 at 6:36 am
I wonder if they have annuties that are insured that no matter what happend in the market or to the company that you bought the annutie you would still get paid.
February 25th, 2010 at 7:14 am
thanks admin Variable Annuities and the Guaranteed Minimum Payment Rider very like post.
February 25th, 2010 at 4:09 pm
It is amazing how many of our customers are not familiar with this piece of info “You can pass its tax-deferred earnings advantage to your annuity beneficiary and supply her income over much of her life.”
thank you !
February 25th, 2010 at 5:02 pm
Many Fixed Indexed Annuities have income benefit riders that will guarantee a rate of return such as 18% to be taken out as income at a later date…
February 25th, 2010 at 6:48 pm
Talk to an expert on annuities or structured settlements depending on your situation.
May 22nd, 2010 at 7:23 am
Fixed Indexed Annuities have income benefit riders that will guarantee a rate of return
June 1st, 2010 at 11:10 pm
Yes, I think The Annuity world is changing fast and dramatically. There are VA’s that now have guaranteed rates of return 5%, 7% etc.
July 13th, 2010 at 8:13 am
Hey 6% compounded is pretty good as a guarantee i would think the extra cost has got to be worth it.
July 19th, 2010 at 8:15 am
In the UK, since the 2010 Budget, the governments changes to retirement regulations now state that it is no longer complusory to buy an annuity.
With this in mind and the lack of economic stability in the UK, fixed rate annuities may be more popular than variable since interest rates in the UK are not yet stable.
July 30th, 2010 at 2:52 am
I prefer fixed annuities than variable. It depends on the situation or condition of the investor. Proper planning is needed before investment.
August 5th, 2010 at 4:49 am
I would just be careful witht he variable annuities…
Instead of paying more for a rider or allowing your payouts to be reduced, why not combine the potential gain of a variable annuity with the fixed rate of a fixed annuity. I usually recommend some combination of both to my clients. That way you let your upside run and at least have a floor rate to rely on…
Keep up the good work!
-John
August 9th, 2010 at 9:50 am
Great Article. Its really a good idea of thinking about retirement and go about these monthly income scheme.
August 21st, 2010 at 6:20 am
It is amazing how many of our customers are not familiar with this piece of info “You can pass its tax-deferred earnings advantage to your annuity beneficiary and supply her income over much of her life.”