Standalone Living Benefits Provide Guaranteed Income without Annuities

The standalone living benefit (“SALB”) is a relatively new and innovative product in the retirement income arena.

A SALB is basically the same thing as the guaranteed lifetime withdrawal benefit (GLWB) that accompanies many variable annuities.  The GLWB feature allows the contract holder to withdraw a fixed percentage of the total annuity premiums each year regardless of market performance.

What makes the standalone living benefit different is that the GLWB has been “stripped away” and can exist independently of the variable annuity.  This allows the owner of the standalone living benefit to receive the guaranteed income and longevity risk protection of the GLWB without having to purchase a variable annuity.  The SALB guarantee is still an annuity and provides insurance—it just does not have to be coupled with a variable annuity.

Standalone living benefits are intended to accompany a pool of money or assets that are being managed.  The owner of a professionally managed private investment account who purchases a SALB would have all the features and protections of the GLWB. 

For example, assume that a person with $350,000 purchases a SALB that pays 5%.  This person would be able to receive the 5% guaranteed income stream for life.  The actual amount of the income stream would be $17,500 ($350,000 x 5%), and this amount would not be affected if the value of the $350,000 portfolio decreases.

There is an annual step-up with SALBs, so income stream in the example above would increase if market conditions are favorable and the value of the $350,000 portfolio increases.  For example, the contract holder’s guaranteed lifetime income would increase to $20,000 per year if the portfolio value increases to $400,000.

The SALB contract holder also has the ability to choose when to apply or remove the guarantee.  SALBs do have a spousal option and there is little to no death benefit.

The cost of a SALB is based on a number of factors—equity market volatility being a fundamental driver of cost.  A very rough cost estimate would range from 75 basis points to 2 percent.  In our example above, a 1 percent fee would equate to $3,500 per year (1% X $350,000).

A higher equity allocation (versus fixed income) in a portfolio likely results in higher costs.  In fact, some insurance companies providing SALBs will limit equity allocations to a certain percentage of overall assets.

In contrast to variable annuities, gains on SALBs are taxed.  On the positive side, though, there are potentially no contingent deferred sales charges with SALBs.

SALBs are not necessarily widely available yet.  The product works best with professionally managed assets that are governed by certain accounting features.  In addition, many SALBs come with minimum asset requirements.

Some of the insurers providing or intending to provide SALBs include Phoenix, Genworth, Nationwide, Allianz and Transamerica.