Insurance

When you buy variable annuities, you are typically given a standard set of benefits that come with your contracts with the annuity provider. But to augment the income you will receive from these variable annuities, you also have the option to purchase living benefits.

As most of us know, variable annuities enable us to invest our money across different funds managed by the insurance provider. Doing so allows us to grow our money and enjoy more payoffs depending on market performance. But because markets fluctuate all the time, living benefits are meant to protect us against downward slides in the market.

Living benefits come in many forms. There are four types you can choose from, and these are:

1. Guaranteed minimum income benefit (GMIB). GMIB is basic protection for your investments in case they are negatively affected by market movements. If you have GMIB on your annuity, an interest rate is set on your money and the interest earnings are set aside for a certain period of time. Once this time period elapses, you are paid off of these interest earnings for the rest of your life even when the market has wiped out your original investment.

2. Guaranteed withdrawal benefit (GWB). A GWB allows you to withdraw a set percentage of your money from the insurance company within a certain number of years. With a GWB, you are sure to get your money back portion by portion (not as a lump sum, though) in case your investment fails. On the other hand, having a GWB on your annuity allows you to invest more money in case your investments do grow according to market movements.

3. Guaranteed account value (GAV). A GAV is similar to a GWB in that you can get your money back in its full value from the insurance company. With a GAV, however, you get your money in lump sum rather than in portions. The catch here is that you have to hold your annuity contract for a specified amount of time, usually five to ten years, and that you give the insurance company the authority to move your money across different accounts on your behalf. If the investments fail, you are given your money back in the amount you have originally invested or in its total value when you last stepped up your contract.

4. For-life benefits. With a for-life benefit, you get paid a certain percentage of your investment for as long as you live, regardless of how much value your account has at any given point in time. If your investment performs positively, you are given the chance to put more money into your annuity.

Living benefits are something you should look into when you buy your variable annuities. They will protect your investment and assure you that you will get your money back no matter how bad the economy is.