How to Choose Annuity Guaranteed Minimum Withdrawal Benefits

Today many of the old concepts of what a variable annuity should be, have fallen to the wayside. The original annuity needed to be annuitized in order to guarantee an income. Annuitizing a product means that you give up all rights to the principal. Today many new products contain riders that guarantee you always receive a specific amount of money for a certain number of years without giving up your principal. Read on to learn how to choose annuity guaranteed minimum withdrawal benefits.

Difficulty: Moderate

Instructions

Things You'll Need:

• Brochures detailing the riders on several annuities
• Pencil
• Paper
• A hypothetical

1. Look at the brochures from several companies on their guaranteed minimum withdrawal benefits. Not all options are alike. There are many different names that make the comparison a little more confusing. Check to see the maximum and minimum age the rider can be used.

2. Request that the sales person clarify whether the rider is a guaranteed minimum withdrawal benefit or guaranteed minimum income benefit. The guaranteed minimum withdrawal benefit rider simply states you are guaranteed to get back no less than you put in if a specific percentage is withdrawn. The guaranteed income benefit requires annuitization.

3. Know that the guaranteed minimum withdrawal benefit allows the consumer to withdraw a specific percentage per year. Many new riders credit the account a minimum amount, usually 5 percent but it can be higher, each year. If less is withdrawn than this amount then the account grows. The rider ceases or the base is reduced if more is taken.

4. Understand that the death benefit goes down if another rider isn’t added. There may not be money left at your demise for heirs unless another rider is added. See if the rider transfers to a beneficiary spouse.

5. Know that each rider costs a specific percent. The riders' cost is calculated in base points, which is just a fancy way of saying tenths of a percent. Many average 65 bases points or .65 percent. This cost is removed from your balance.

6. Read an annuity statement. There are two separate balances. The first is the guaranteed balance, your principal and the guaranteed growth or remaining principal. The second is the real balance, the amount that your annuity is worth if there were no guaranteed minimum withdrawal benefit.

7. Check for the reset and reset timing. If the growth can be reset on specific anniversaries this is a powerful feature because a higher amount can become your new base. If you are withdrawing and the account outpaced the withdrawal or guaranteed base, the increase is reflected at that time and with a reset, becomes your new base. The more frequent the resets, the better the rider. The market can rise and fall in a five year period losing any gain. If the reset is more frequent than once every five years, such as every year or even as often as each day, there is a better chance of a gain being locked in and a better base from which to withdraw.

Tips & Warnings

• Ask the representative for a hypothetical which demonstrates the rider with numerical examples. Keep this with any annuity that you purchase for future reference.
• Feel comfortable to ask for additional advice.
• Every company has a different name for the riders. Make certain that you understand specifically, all the fine points and downsides.

[bizewriter]

on 2/14/2008 Very informative financial article!