Variable annuity benefit allows principal to grow

Retirees who don’t want to take chances with their money often buy certificates of deposit. At 5 percent interest, you’d collect $5,000 a year on a $100,000 certificate and protect your principal.

But your principal wouldn’t grow either, so it couldn’t keep pace with inflation.

Here is an alternative: With a relatively new type of investment, you would collect as much as 6 percent, or $6,000 a year, guaranteed by an insurance company. In addition, your principal would have a realistic chance of growing beyond $100,000, allowing you to increase your annual income above $6,000.

Even if your principal remained stagnant or declined, you could set it up so your heirs receive at least the $100,000 you put in, or even more.

This is not a con. This is a description of some of the most attractive benefits insurance companies are adding - for an extra fee each - to variable annuities, which are basically tax-deferred mutual fund investments within an insurance wrapper.

We have looked closely at more than two-dozen annuities offering such benefits, both for personal interest and as research for this column. Our major conclusion: Before buying anything, you need to thoroughly understand the benefits and decide whether they are worth the cost to you. (Web sites such as, and explain these products.)

Today, as an example and not a recommendation, we’ll discuss a “minimum guaranteed income benefit” by The Ohio National Insurance Co., one of the most innovative we’ve found.

(This review by necessity is brief and general in nature. For details, including age and other limitations, you need to read - and make sure you understand - the annuity prospectus. If you need help, get advice from a professional who does not stand to gain or lose whether you buy or not. We do not own this annuity.)

Under this benefit, the investor can withdraw up to 6 percent of the initial investment each year regardless of how the investments perform. (Invest $100,000, take out up to $6,000 a year.)

With a no-lapse provision, the investor - and surviving spouse, under a spousal continuation feature - is protected if the actual account value is depleted by withdrawals and/or poor investment results. In that case, the investor and/or spouse will receive annuitized lifetime income payments based on a “guaranteed income base.”

That base is no less than the initial investment (reduced by any allowable annual withdrawals) compounding at 6 percent a year. (Invest $100,000, withdraw $6,000 a year and even if the account is depleted, annuitize on a $100,000 base.) If the account value is not depleted, the investor also has the option after 10 years to annuitize the policy based on at least the guaranteed income base.

You need to understand a couple of things here.

At a recent seminar we attended where this annuity was pitched, comments from the audience made it obvious they didn’t really understand.

First, the guaranteed income base is not cash you can take but simply a number used to calculate the annual payments you receive.

And if you annuitize under this benefit, the payments will be based on a lower interest rate than what is used to calculate regular annuity payments. Always ask to see a worst-case scenario of what payments would be if you annuitize.

On the plus side, you can “reset” the guaranteed income base annually or every five years if your investments do well, increasing the amount you can withdraw.

You can select from a number of death benefits so your heirs receive at least as much as you put in even if you take the maximum allowed annual withdrawals, or more than you put in if you withdraw less.

The more benefits you choose, the more they’ll cost and the more these costs will reduce your actual account value. It’s up to you to decide whether the tradeoff is worth it.

Humberto and Georgina Cruz are a husband-and-wife writing team who work together in this column. Send questions and comments to,