Most advisors who sell investment products with guaranteed minimum withdrawal benefits know that the guarantee has its limitations.

The product offers a variety of ways to help you steer clients away from income trouble in their retirement years. But, simply put, the manufacturers cannot guarantee income in instances in which a client chooses to withdraw from his or her account more than would be sustainable over the long term.

“All a GMWB does is guarantee to return your money to you,” says Michael Aziz, regional vice president with Desjardins Financial Security in Toronto. “We can’t pay you on money you haven’t left with us.”

While that same principle applies to every GMWB product on the market, the manner in which the manufacturers account for an overwithdrawal varies, and these distinctions are worth knowing.

For example, assume your client has a $100,000 contract in Desjardins’ Helios product, which pays your client $5,000 annually for life. If your client needs to withdraw more than the $5,000 in any one year, that contract is broken. But Desjardins will allow the client to set a new lifetime minimum withdrawal base.

“If you withdraw in excess of your contract,” Aziz says, “you can reduce your income stream.”

It’s important to note that the re-calculation is in proportion to the excess amount withdrawn from the value of the client’s contract, not on the market value of the balance after the client makes the withdrawal. That distinguishes Helios from other products, says Aziz.

Manulife Financial Corp. makes a similar “downward adjustment” on its IncomePlus GIF product if the client withdraws too much. But the remaining capital is reduced to its market value at the time of the withdrawal. Sun Life Financial Inc. and Empire Life Insurance Co. make the same adjustment.

Depending on the circumstances, says Aziz, the treatment can make a difference. Advisors and clients should make the calculations.

Last month, Manulife added a “Guarantee Guard” to its client service that essentially flags the client for a withdrawal in excess of the guaranteed amount in the original contract. The withdrawal will not be processed, says Michael Ondercin, assistant vice president for segregated fund products with Manulife in Toronto, “until confirmation of the initial request is received from either the client or his or her advisor.”

GMWB products offer the usual capital guarantees and resets similar to those that segregated funds provide, along with guaranteed annual income that lasts for the policyholder’s life in some versions of the product. GMWB products have proven to be popular with pre-retirees and retirees who want some exposure to the markets without the risks.

Starting in the year in which the client retires — usually age 65 at the earliest — the plans offer 5%-7% of the deposit back in annual income, with most plans continuing until the client dies. Last month, Desjardins extended the withdrawal benefit on its Helios fund to lifetime from its previous guarantee period of 15 years.

GMWB products present a wide range of options. They are available with a minimum initial deposit — $5,000, in the case of some versions of Desjardins’ Helios product — with cheaper fees for higher initial investments, starting at $250,000 for Empire Life’s Class Plus. IE

— with files from Olivia Glauberzon