Guaranteed Minimum Income Benefit (GMIB)

What Is a GMIB Rider?

A guaranteed minimum income benefit is a specific type of annuity rider. Riders are additions to your annuity contract that help to ensure your financial goals are met.

Adding riders can strengthen your contract through their various provisions, but they also come with an additional cost and can result in a lower payout.

Key Facts About a GMIB Rider

• A guaranteed minimum income benefit is a rider that is often used for both variable and fixed index annuities.
• For annuities that can vary based on market volatility, a GMIB rider provides additional security by guaranteeing a minimum monthly payment.
• The cost of a GMIB rider varies, ranging from 1% to 1.5% of the contract value.

If you opt to add a GMIB to your annuity, the insurance company essentially promises to keep sending you regular payments even if you withdraw all the money from your contract. A GMIB rider helps to alleviate the common fear of running out of money in retirement.  

To better understand GMIBs, it’s important to first understand variable annuities since this is the type of product GMIB riders are most often attached to.

A variable annuity is a tax-deferred insurance product that pays benefits to the contract holder over a specified number of years. To purchase a variable annuity, you pay a premium to an insurance company and select the subaccounts to which you want your money allocated. This collection of investment vehicles makes up the annuity’s underlying portfolio and has the potential to increase the value of your contract.

Variable and fixed index annuities contain underlying investments, which are typically stocks, bonds, mutual funds or low-cost index funds.

The period during which the insurance company holds your money and earns interest is known as the accumulation phase and normally lasts seven to 10 years.

Once the accumulation phase is over, your investment is converted into a stream of periodic income payments, similar to a pension. The size of these payments is based, in part, on how the underlying investments performed during the accumulation phase, exposing your premium to both the potential benefits and pitfalls of market risk.

Guaranteed minimum income benefit riders provide protection against the downside risk. As the name implies, a GMIB rider sets a guaranteed dollar amount of your payout from the insurance company — regardless of the annuity’s investment performance.

Choosing a GMIB rider ensures you receive at least a minimum payment from your annuity. This can help alleviate concern and provide income protection in retirement. However, you need to make sure you know exactly how it works and what it costs before including it in your contract.

Brandon Renfro, Ph.D., CFP®, RICP®, EACo-Owner of Belonging Wealth Management

As a Certified Financial Planner™ professional and Retired Income Certified Professional®, Brandon Renfro is well-versed in the financial information and strategies needed to meet retirement goals. In addition to co-owning Belonging Wealth Management and assisting clients, Brandon writes regularly for financial publications.

How a GMIB Rider Works

An annuity with a GMIB rider has two different values.

The first is the actual market value, which is based on the performance of the annuity’s underlying investment portfolio. The second is the GMIB account itself.

Unlike the value of the annuity, which can fluctuate according to the market, the GMIB value increases based on a compounded annual rate, usually, between 4% and 7%, according to the U.S. Securities and Exchange Commission.

This annual guaranteed percentage is credited to the separate GMIB account each year until you reach a certain age, at which point its value is frozen.

Example of a GMIB

Say, for example, that you purchase a $100,000 variable annuity with a GMIB rider and agree to a compounding rate of 6%. You also agree to begin receiving payouts from the insurance company in 10 years, at which point, regardless of the value of your annuity contract, the insurance company begins sending you regular payments for the rest of your life.

Let’s assume that during the 10-year accumulation phase, the market did not perform as well as you had hoped, and netted only a 5% annual return on your original $100,000 premium. This means the market value of your variable annuity is now only $162,889.

However, because you purchased a GMIB rider, your payout will be based on the higher GMIB account value of $179,084, which compounded at 6% — as opposed to the 5% annual return you ended up with on the base annuity.

Adding the rider helped you to make up for the poor market performance you experienced during the accumulation phase.

How Much Money Will You Actually Receive Each Year?

Insurance companies use what’s known as a payout factor to determine how much money you receive from your annuity each year, and riders tend to pay out more as you grow older.

That said, while the accumulation phase for a variable annuity usually lasts 10 years, this doesn’t mean you must begin receiving payments as soon as it ends. In fact, the longer you wait, the higher your monthly payments will be.

Think of our earlier example. The amount of money the insurance company pays is based on the value of the GMIB account due to the fact that, at $179,084, its value is larger than the market value of the annuity.

If you start receiving payments between the ages of 59 and 64, an insurance company may give you 4% of your GMIB value each year. So, in our example, 4% of $179,084 is about $7,163 a year before fees and taxes.

But, if you wait until you’re 65 to 79 years old, the insurance company may offer you 5% of the GMIB value each year. This would equal $8,954 before fees and taxes.

Pros and Cons of GMIBs

There are both pros and cons to including a GMIB rider in your annuity contract. While this addition can be valuable and add additional protection, it is important to consider the disadvantages.

Pros

The main pro of adding a GMIB rider is protection against the inherent market risks that come with purchasing a variable or fixed index annuity. Annuities that are tied to the performance of a portfolio or market index can produce significant returns.

However, they can also cost you if there is poor market performance during the accumulation phase of your annuity. This is where a GMIB rider factors in, guaranteeing a minimum payment that is unaffected by market volatility. 

Adding a GMIB rider can also help annuity owners to feel more secure in their retirement. Running out of money is a major concern for many retirees. A guaranteed minimum income benefit helps alleviate that risk.

Cons

While a GMIB can protect against running out of money in retirement and offer a higher payout if the value of your annuity decreases, it entails a cost.

Riders are generally paid for by an automatic transfer of funds from the principal investment to the rider account each year. The rider charge is usually around 1% annually. Some fixed index annuities have zero annual fees for a rider, while some variable annuities have income rider fees as high as 1.5%.

If you want to add multiple riders to your contract, the cost can quickly rise, since each rider comes with its own fees.

Another downside to GMIB riders is that a wide range of options exists, making it potentially difficult to nail down which version makes the most sense for you. When searching for the right choice, it makes sense to be on the lookout for a high compounding value and reasonable fees.

It’s also worth noting that some GMIB riders come with age limits.

Frequently Asked Questions About GMIB Riders