What Is a GMAB Rider?
A guaranteed minimum accumulation benefit (GMAB) is an optional rider that variable annuity owners can add to their contracts. The benefit guarantees that the annuity’s value will be at least equal to the principal amount, less any withdrawals, at the end of a waiting period.
GMAB riders give variable annuity owners peace of mind by offering principal protection, a feature common to other types of annuities. Because variable annuities invest your premium dollars in a portfolio of securities, there is typically some risk that your contract’s value will decline if the market performs poorly.
A GMAB rider eliminates this risk, promising that no matter how your investments perform, you won’t lose money. For many variable annuity owners, this means they can invest their premium dollars more aggressively, knowing that, at worst, they’ll break even.
The ten years leading up to retirement can be nerve-wracking and precarious for soon-to-be retired individuals. There is little room for error in the event of a market downturn, which is why guaranteed benefit riders can be a substantial confidence booster for investors. As with any piece of an income strategy, work with an advisor to create an income roadmap so that the annuity will only be used after all surrender and holding periods have expired.
Stephen Kates, CFP®Principal Financial Analyst for Annuity.orgStephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.
How Does a GMAB Rider Work?
Most annuity providers stipulate that customers can only add a GMAB rider when they first purchase a variable annuity. The average cost for a GMAB rider ranges between 0.30% and 1.00%.
The GMAB rider cannot be used until the end of a holding period, typically 10 years. When the waiting period ends, the annuity owner may choose to renew the GMAB for another waiting period. Otherwise, the benefit expires, and the variable annuity’s value is subject to market risk.
Unlike many other living benefits, GMABs do not require annuitization. After the required holding period, you can choose to take a lump-sum payout rather than converting your annuity into an income stream.
When choosing subaccounts for a variable annuity with a GMAB rider, consider your risk tolerance and time horizon. Also, be aware that many providers limit the number of subaccounts available to investors if they choose to add a living benefit to their contract.
Since the benefit offers principal protection, you may choose to allocate your investments more aggressively than you might otherwise. The Institute of Business and Finance recommends stock subaccounts because of the long holding period required for annuities with this provision.
A variable annuity with a GMAB rider can provide aggressive growth while protecting your savings from the downsides of market volatility.
Step-Up Provision
Some annuity providers offer a GMAB rider with a step-up provision. Your provider will compare the cash value of your annuity to the original purchase payments, and if the current cash value is higher, it will be locked in as the new baseline for the GMAB.
Once the value of the contract is stepped up, the waiting period for the new value resets. So if you have a GMAB rider with a 4-year step-up provision and a 5-year holding period, the stepped-up value would be available any time after the ninth year.
Step-up frequency varies by insurer and contract. Step-ups are typically locked in on the contract’s anniversary date, either annually or every three to seven years.
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Who Should Get a GMAB Rider?
Investors concerned about market volatility might benefit most from GMAB riders. The market participation of variable annuities makes them inherently riskier than fixed annuities; however, they may offer higher growth potential than a fixed-income product.
A GMAB rider can suit an investor who wants the best of both worlds. With this provision, you can benefit from the market’s upside potential while preserving your principal in the event of a downturn.
The GMAB rider balances the conservative investor’s need for principal protection with the aggressive investor’s desire to participate in a fluctuating market. As such, a married couple might choose a variable annuity with a GMAB rider if the spouses have different levels of risk tolerance.
The long holding period required means that a variable annuity with a GMAB rider is most suitable for an investor who still has a decade or more until retirement. With this in mind, those who need income sooner may be better suited to a different type of annuity, such as an SPIA.
