GMWBs: The Price of Security

Investors who purchased products that offered a Guaranteed Minimum Withdrawal Benefit (GMWB) are now realizing that security has a price, and are now facing changes in the terms of the contract. In effect, customers will be  paying more for fewer returns from the same instrument.

How is this possible? When GMWBs were launched, the stock market was near its peak.  But when equity prices crashed, insurance companies were forced to set aside billions of dollars to ensure that they could pay off the guarantees on them. This has resulted in their  scrambling to change what the products offer in order to rebalance the amount of risk the insurer takes on versus the client’s returns. To offer more secure instruments in an insecure  economy, these companies must charge higher fees and offer lower returns.

When these types of products were launched, PWL’s investment team evaluated them carefully  and felt that they presented hidden risks. Consequently, we have not yet recommended any of these products for our clients.