GMIB annuity: When does the rider make sense?

One of the biggest concerns for investors — especially those nearing or in retirement — is the risk of losing money in the market. That’s why many variable annuities offer a guaranteed minimum income benefit (GMIB) rider, which provides a level of income certainty. It can be a valuable safeguard, but the guarantee comes with costs and conditions you’ll want to understand before adding it to your contract.

This article explores how GMIBs work, when they can make sense, and alternatives to consider.

What is GMIB on an annuity?

A guaranteed minimum income benefit is an optional rider you can add to certain deferred annuities. A GMIB guarantees that you will receive a minimum level of lifetime income after you annuitize, no matter how the market performs. 

Even if market volatility reduces your contract’s value, the GMIB sets a baseline income amount the insurer must provide, offering added reassurance for long-term retirement planning.

Variable annuities

GMIBs are most common with variable annuities. In a variable annuity, you can lose money because your account value fluctuates based on the performance of the annuity’s underlying investments called subaccounts. 

When the market does well, depending on the subaccounts, you could receive income that exceeds the guaranteed minimum. However, when it performs poorly, the GMIB ensures you receive baseline income calculated from a separate benefit base.

Indexed annuities

Some fixed indexed annuities (FIAs) offer the GMIB rider option. Rather than investing directly into the stock market, FIAs credit interest to your annuity based on the performance of an index like the S&P 500. An FIA protects your principal from losses, but also limits your growth with caps and participation rates. 

When you add a GMIB to a fixed index annuity, the benefit serves a similar purpose as it does in variable annuities but operates differently. It establishes a guaranteed income floor while still allowing you to benefit (at least, partially) from market-linked growth.

Pros and cons of GMIB riders

A GMIB rider can make variable or indexed annuities feel more secure, but that added assurance comes with trade-offs. 

Here’s a look at the potential benefits and drawbacks to consider.

Pros

Lifetime guaranteed income

After you annuitize, the GMIB guarantees a steady lifetime income stream — even if lackluster market performance reduces your annuity’s account value. This built-in promise makes them attractive to investors, particularly retirees, who want market exposure while still locking in a reliable income.

Downside protection

A GMIB functions as a financial safety net. If the market underperforms, you’re still guaranteed a minimum level of income based on the benefit base, not the reduced account value. This helps safeguard your retirement strategy by ensuring you won’t outlive your income, no matter how volatile the market becomes.

Cons

High fees

These guarantees come at a price. GMIB riders can add between 1% and 1.5% to the base annuity. These fees can eat into your gains, especially over the long term. 

Requires annuitization

Unlike a guaranteed minimum withdrawal benefit or guaranteed living benefit rider, you must annuitize your contract to access the GMIB. Once annuitization begins, you convert your annuity value into a fixed income stream and the GMIB rider no longer applies. 

Possible loss of liquidity

When you annuitize, you typically give up access to your principal, meaning you can’t withdraw a lump sum without terminating the contract. This lack of flexibility, where income is guaranteed but your principal is no longer accessible, can be a deal-breaker for many retirees.

How a GMIB rider works

GMIB riders add guaranteed minimum income protection to deferred annuities by calculating a separate benefit base. It’s a guaranteed growth amount that increases at a predetermined “roll-up rate.”

During the accumulation period, this benefit base grows at this fixed rate, often between 4% and 7%, irrespective of market performance. When you annuitize, the insurer calculates your guaranteed income using the benefit base — not your account value, which may have declined due to poor market performance. Your account value is often different than the benefit base. 

1. Accumulation phase

You purchase a deferred annuity with a lump sum investment or ongoing premium payments. You add on (and pay an additional fee for) the GMIB rider. As your account value ebbs and flows alongside market volatility, the benefit base compounds annually at its fixed rate, setting a floor on your future income. 

2. Waiting/vesting period

To activate a GMIB rider, you typically must wait through an accumulation or deferral period before you can begin receiving the guaranteed income. During this period, the benefit base compounds regardless of market conditions. 

3. Election phase

Once the vesting period ends, you can choose whether to activate your GMIB rider. If your investments performed well, you may decide not to use it. If the market lagged, you might annuitize so your payments are based on the guaranteed benefit base rather than a reduced account value. The choice is yours, but the GMIB fee remains non-refundable either way.

4. Payout phase

If you activate the GMIB rider, your insurance company may use factors such as your age and life expectancy to apply a payout factor to your benefit base. For example, a $100,000 premium with GMIB roll-up rate of 6% for 10 years becomes a benefit base of $179,084. At a payout factor of 4% at age 60, you’re looking at annual income of about $7,163. *Results will vary. 

How soon can you annuitize under GMIB?

Most GMIB riders require a 7 - to 10-year waiting or vesting period before you can annuitize. This period is one of tradeoffs of the guaranteed minimum income benefits.

Several factors influence how soon you can annuitize under a GMIB rider and how much income you ultimately receive. Here’s what you need to know.

Why early annuitization can reduce your payout

If you annuitize prematurely, you interrupt the growth of your benefit base. So, your insurance company will likely use a lower payout factor or reduce your guaranteed income. It is important to review the contract and rider information to see the implications of early withdrawal. 

When annual GMIB election windows may apply

After the vesting period ends, some insurers provide a once-a-year window (usually around your contract anniversary) when you can activate the GMIB. It works similarly to an open enrollment period for health insurance. This gives policyholders added flexibility and allows them to choose the timing that best fits their income needs.

What happens if you annuitize before the minimum holding period

If you need to annuitize early and/or take a lump sum, you might pay surrender charges, receive lower payouts, or lose guarantees. If you complete the vesting period, you’ll typically get the most out of a GMIB. 

Your contract should spell out these stipulations and any variations.

GMIB tax treatment

In deferred annuities, you do not pay taxes on earnings until you start taking payments — that’s the benefit of tax-deferred growth. When you convert your annuity into a guaranteed income stream, part of your payment is your original, after-tax investment (which isn’t taxable), while the earnings portion gets taxed as ordinary income. 

If you purchased your annuity inside a qualified account, such as an individual retirement account, you’ll pay taxes on your entire payout because you made the investment using pre-tax dollars. 

These same tax rules apply to income you receive from an annuity with a GMIB rider. That said, tax treatment can vary based on your individual situation, so it’s best to consult a tax professional or financial advisor.

Secure guaranteed retirement income with Gainbridge

A GMIB can offer valuable peace of mind by ensuring you never receive less than a guaranteed income amount, even if market performance weakens your variable or indexed annuity. However, it’s a paid optional rider, and the added protection may come with reduced flexibility in retirement.

When purchasing an annuity, consider whether a fixed annuity makes more sense for your retirement plan. Gainbridge fixed annuities provide growth at a fixed interest rate and can guarantee income for a set period or the rest of your life. 

Explore Gainbridge digital-first annuities today and see how you can secure guaranteed growth and income with no hidden fees or commissions.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional.  The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Withdrawals of taxable amounts are subject to ordinary income tax and if made before age 59½, may be subject to a 10% federal income tax penalty. Distributions of taxable amounts from a nonqualified annuity may also be subject to an additional 3.8% federal tax on net investment income.

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