A person who wishes to plan for his retirement is often confused about the type of annuity to invest in, whether to opt for a fixed, or variable annuity. The living benefits feature attracts a lot of people who would be willing to invest in an annuity. Such monetary benefits offer extremely generous returns.
First off, let us understand the meaning of the term annuity. The simplest definition says that it is principally any income and monetary benefit oriented capital investment which is either paid in bulk or paid in a series of installments. The annuities are broadly classified into two categories, namely, fixed and variable. Fixed annuities are chiefly the ones that tend to variable returns while the fixed annuities tend to have benefits which are fixed and pre-decided.
In several cases, annuity has also been referred to as a ‘contract’ and in some cases, its similarity with the common insurance has deemed it to be termed as an ‘insurance’. Fact is an annuity is a separate genera of investment and irrespective of similarity, it is congruent to neither contracts, funds or even insurance policies. Broadly speaking, there are two features of an annuity, living benefit and death benefit. There are of course, some individual benefits innovated in almost all the annuities.
Overall, the living benefits are the benefits which are paid by the company to the investing person, when he or she is alive. In contrast the death benefits are paid to the investing person’s surviving relatives and first blood relations or the nominated people, as per the contract of the annuity.
Guaranteed Minimum Income Benefit
This term is usually used in case of variable annuities. The mechanism of the Guaranteed Minimum Income Benefit (GMIB) is simple enough. When you invest money into an annuity the amount is invested by fund managers into different channels and investment destinations. Such investments are thoroughly analyzed and underwritten so as to ensure that a maximum return on investment is attained.
In case of a variable annuity the returns are variable in proportion to returns i.e.: they are shared in proportion to the achieved return on investment. In short, the returns that you would receive as the annuity’s living benefit would be in accordance with the performance with the overall performance of the economy, your portfolio and the index of the investment.
The GMIB is the most important living benefit for the people holding investments in variable annuity as, as per this clause, the annuity tends to have a certain minimum payment facility, that is, irrespective of the performance of the portfolio, economy, index or the annuity, you, as an investor would receive certain minimum returns.
Conventionally, in almost all the annuities, the GMIB accounts and amounts to about, the total amount that you invested, minus the load and commission, plus about 5-7% of interest on the principal amount invested into the annuity. Now in case of the fixed annuities, almost all the benefits are GMIBs as the performance of the economy, index or your portfolio does not affect the returns that you are going to receive, though the returns are much higher.
Minimum Accumulated Benefit
Sometimes wrongfully termed as the Guaranteed Minimum Accumulation Benefit (GMAB), this benefit is found in variable annuities. Now as mentioned above, a variable annuity is called so owing to the fact that the returns are variable and depend upon the markets, portfolio, index and the economy in general.
When you invest into the annuity the company pays you a living benefit which consists of GMIBs plus the profit from the portfolio which the company shares. The minimum accumulated benefit is the cash balance which has been accumulated in the portfolio. The company of course takes in some portion of the accumulated cash balance.
Annuity Life Benefits Related to Withdrawal
Certain annuities carry a clause which is known as a withdrawal clause. As per this clause, after certain years and after certain installments, the annuitant is able to withdraw certain amounts of money from the annuity, without affecting the total returns that are expected to yield. This clause is known as the withdrawal benefit clause or the Guaranteed Lifetime Withdrawal Benefit (GLWB). Some annuity providers also facilitate withdrawal, beyond the specified limit, however the returns or the living benefits are affected as a result.
The living benefits of an annuity makes it a great instrument of investment. Apart from the annuity living benefits there are of course the death benefits which act as indemnity security.