Annuity Living Benefits: Good Idea or Marketing Scheme?

Bill Losey is a national retirement strategist and contributor to On the Money. Visit him at

My wife and I were approached by a financial planner about investing $250,000 in a variable annuity with living benefits. It sounds too good to be true. Is it a good idea or just a marketing scheme to get my money?

A: After the bear market of 2000-2002, insurance companies began offering living benefit options in their variable annuity contracts. These benefits help protect your nest egg from the ups and downs of the stock market but come at an additional annual cost. Living benefits can add .25% to 1.5% in annual fees to the typical .75% to 2% in annual costs of a variable annuity.

Contracts usually have four primary living benefits:

Guaranteed Minimum Income Benefits (GMIB): This benefit provides assurance of a certain level of income in the future.

Guaranteed Minimum Withdrawal Benefits (GMWB): This benefit provides assurance that you can withdraw a certain percentage of your investments annually.

Guaranteed Accumulation Benefits (GAB): This benefit provides that after a set number of years, usually 10, your account will be worth a minimum level, even if your account declines in value.

Guaranteed Lifetime Withdrawal Benefits (GLWB): This benefit provides a payout guaranteed for life.

So is it a good idea or a marketing scheme? Personally, I’ve found that if you broadly diversify your holdings, and you have realistic withdrawal expectations, you won’t need to pay an insurance company for these living benefits. I’ve also found that a diversified investment portfolios performance often times exceeds whatever minimum protections the insurance company guarantees provide.

Bill’s Bottom Line: If you’re contemplating investing in an annuity contract, you’ll want to make sure you’re dealing with an insurer who is financially solid. There are credit rating companies such as Moody’s, Standard and Poor’s, and A.M. Best that provide objective commentary and analysis of an insurer’s financial stability. Proceed cautiously.