FINRA Series 7Investment Information and Suitable RecommendationsHard
A client has a substantial portfolio of highly appreciated growth stocks and is concerned about protecting their capital while still participating in market gains. They are 60 years old and wish to eventually convert a portion of their assets into a reliable income stream. Which of the following variable annuity features would be most suitable to meet their current and future needs?
- AA death benefit rider with a stepped-up basis
- BA fixed account option for guaranteed principal
- CA guaranteed minimum withdrawal benefit (GMWB)
- DA surrender charge schedule that declines over 10 years
Show answer & explanationAnswer & explanation
Correct answer: C. A guaranteed minimum withdrawal benefit (GMWB)
A Guaranteed Minimum Withdrawal Benefit (GMWB) rider allows the client to withdraw a specified percentage of their initial investment (or a higher 'benefit base' that may grow with market gains) for life, regardless of market performance or account value. This addresses both capital protection and future income stream needs, without forcing a complete liquidation of growth stocks immediately.
Why the other options are wrong
- A. A death benefit protects beneficiaries but does not address the client's living income or capital protection concerns.
- B. A fixed account offers principal guarantee but does not address participation in market gains or the specific need for a guaranteed *withdrawal* stream based on a potentially higher benefit base.
- D. A declining surrender charge schedule is a feature of most variable annuities but doesn't directly address capital protection, market participation, or guaranteed income stream needs; it only pertains to liquidity costs.
Guaranteed Minimum Withdrawal Benefit (GMWB)
A variable annuity rider that guarantees the owner can withdraw a certain percentage of their initial investment (or a benefit base) annually for life, even if the account value drops to zero.
- Protects against market downturns impacting income stream.
- Benefit base may step up with market gains, locking in higher withdrawal amounts.
- Allows for continued market participation while guaranteeing an income floor.
Memory trick: GMWB: Guaranteed Money Withdrawn for life, a Benefit.