The New York Insurance Department (“NYID”) prepared a draft circular letter (“Draft Circular Letter” or “Letter”) in early June, which, if finalized and issued, will require insurers to advise consumers of the implications of excess withdrawals from annuities with guaranteed minimum withdrawal benefits (“GMWB”).
A GMWB allows consumers to periodically withdraw a specified guaranteed amount from a contract regardless of the remaining contract value; it can provide lifetime benefits for the contract holder. However, if the contract holder withdraws more than the specified guaranteed amount, the amount of future guaranteed withdrawals will be permanently reduced. According to the Letter, the amount of the permanent reduction is typically calculated as follows:
Guaranteed Withdrawal Amount x Ratio of the Excess Withdrawal to the Remaining Account Balance
(after the reduction for the withdrawal benefit, but prior to the excess withdrawal)
The Draft Circular Letter provides the following example involving a contact with a value of $500, a GMWB of $100, and a withdrawal of $180 (with $80 being the excess over the GMWB amount).
$100 x $80/($500-$100) = 20
The permanent reduction in future periodic withdrawals will be 20%, meaning that the subsequent guaranteed withdrawals will be reduced from $100 to $80.
The NYID is concerned that the reduction in the guaranteed withdrawal amounts can, in some cases, be unfairly disproportionate compared to the amount of the excess withdrawal. Therefore, the Draft Circular Letter requires insurers to provide disclosures explaining the impact of excess withdrawals. These disclosures should be provided to contract holders before contract issuance, and at the time an excess withdrawal is requested.
The Draft Circular Letter has not yet been finalized and issued. We will continue to monitor this topic and provide further updates on InsureReinsure.com.