Annuity Features and Riders
Variable annuities offer various features and optional riders that provide additional guarantees. Understanding these features, their costs, and their benefits is essential for Series 6 exam success and for making appropriate recommendations.
Standard Death Benefit
Most variable annuities include a standard death benefit at no additional charge:
Standard Death Benefit: If the annuitant dies during the accumulation phase, the beneficiary receives the greater of:
- The current account value, OR
- Total premiums paid (minus any withdrawals)
This protects beneficiaries from receiving less than was invested, even if the market declined.
Enhanced Death Benefits (Optional Rider)
For an additional fee, enhanced death benefits may include:
| Enhancement | Description |
|---|---|
| Stepped-Up Death Benefit | Lock in gains at specified intervals (annually, on anniversary) |
| Highest Anniversary Value | Death benefit equals highest value on any contract anniversary |
| Roll-Up | Death benefit grows at a specified rate (e.g., 5%/year) regardless of market |
Cost: Enhanced death benefit riders typically cost 0.25% to 0.75% annually.
Guaranteed Living Benefits (GLBs)
Living benefit riders provide guarantees while the annuitant is still alive. These are the "GM" riders frequently tested on the exam:
GMIB - Guaranteed Minimum Income Benefit
What it guarantees: A minimum income amount when the contract is annuitized, regardless of actual account performance.
How it works:
- A "benefit base" grows at a guaranteed rate (e.g., 5-6% annually)
- When annuitized, income is calculated using the higher of actual value or benefit base
- Typically requires a 10-year waiting period before exercising
Key Point: You MUST annuitize the contract to receive this benefit. The benefit base is NOT the account value.
Cost: Typically 1.0% to 1.5% annually
GMWB - Guaranteed Minimum Withdrawal Benefit
What it guarantees: The ability to withdraw a percentage of your principal annually (typically 4-7%), regardless of market performance.
How it works:
- Withdraw a set percentage (e.g., 5%) of original investment annually
- Continue withdrawals until you've recovered 100% of principal
- Works even if account value drops significantly
Example: Invest $100,000 with 5% GMWB. Market drops account to $75,000. You can still withdraw $5,000/year (5% of original $100,000) until you've received the full $100,000 back.
Cost: Typically 0.5% to 1.0% annually
GMAB - Guaranteed Minimum Accumulation Benefit
What it guarantees: Your account value will be at least equal to your principal (or a stepped-up amount) after a waiting period.
How it works:
- Typically requires a 10-year waiting period
- At the end of the period, if account value is below premiums paid, it's stepped up
- Does NOT require annuitization
- Can take lump sum after the period
Example: Invest $100,000. After 10 years, account is worth $85,000 due to market losses. GMAB steps up the value to $100,000.
Cost: Typically 0.50% to 0.75% annually
Comparison of Living Benefits
| Rider | Guarantee | Annuitization Required? | Typical Waiting Period |
|---|---|---|---|
| GMIB | Minimum income stream | YES | 10 years |
| GMWB | Withdrawal of principal | NO | None typically |
| GMAB | Minimum account value | NO | 10 years |
Exam Tip: GMIB requires annuitization. GMWB and GMAB do NOT require annuitization.
Surrender Charges
Surrender charges are fees imposed for withdrawing more than the free withdrawal amount during the surrender period:
Typical Surrender Charge Schedule
| Year | Typical Charge |
|---|---|
| 1 | 7% |
| 2 | 6% |
| 3 | 5% |
| 4 | 4% |
| 5 | 3% |
| 6 | 2% |
| 7 | 1% |
| 8+ | 0% |
Free Withdrawal Provision
Most contracts allow 10% of account value annually to be withdrawn without surrender charges:
- Often called the "free corridor"
- May be cumulative (unused portion carries forward)
- Applies even during surrender period
Surrender Charge Waivers
Some contracts waive surrender charges for:
- Terminal illness - Medical diagnosis of short life expectancy
- Nursing home confinement - Extended care need
- Death - Beneficiary receives full value
- Annuitization - Typically waived if contract is annuitized
Free Look Period
State insurance laws require a free look period after receiving the contract:
- Typically 10 to 30 days depending on state
- Full refund of premiums paid
- No surrender charges apply
- Allows time to review and cancel if unsuitable
Other Common Features
Dollar Cost Averaging
- Automatic transfers from money market to other subaccounts
- Invest fixed amount at regular intervals
- Available within the annuity at no extra charge
Automatic Rebalancing
- Maintain target allocation percentages
- Automatically adjusts after market movements
- Available quarterly, semi-annually, or annually
Systematic Withdrawals
- Take regular distributions without annuitizing
- Maintain control over contract
- Subject to surrender charges if in surrender period
Total Cost of Variable Annuities
Variable annuities have multiple layers of fees:
| Fee Type | Typical Range | Purpose |
|---|---|---|
| M&E Risk Charge | 1.0% - 1.5% | Mortality and expense risk guarantee |
| Administrative Fee | 0.10% - 0.30% | Contract administration |
| Subaccount Expenses | 0.25% - 1.00% | Underlying fund management |
| Rider Costs | 0.50% - 1.50% | Optional guarantees (GMIB, etc.) |
| Surrender Charges | 0% - 7% | Early withdrawal penalty |
Total annual cost for a variable annuity with riders can easily reach 2% to 3.5% or more.
Key Exam Points
- Standard death benefit is typically included at no extra cost
- GMIB requires annuitization; GMWB and GMAB do not
- Surrender charges typically decline over 5-7 years
- Free withdrawal of 10% annually is common
- Free look period allows cancellation without penalty
- Living benefit riders add 0.5% to 1.5% annual cost
A GMIB (Guaranteed Minimum Income Benefit) rider guarantees:
Which living benefit rider does NOT require annuitization to receive the guarantee?
A variable annuity has a 7-year surrender period with declining charges. In year 3, the client needs to withdraw 25% of the account value. How much is subject to the surrender charge?
3.5 Variable Annuity Taxation
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