Guaranteed minimum death benefit
An option on a unit-linked contract guaranteeing the beneficiary, on death, at least the amount of premiums paid, even if markets have fallen.
On a unit-linked contract, the insurer guarantees only the number of units, not their value: if markets fall, the capital falls. A guaranteed minimum death benefit corrects this risk in one specific case, the insured's death. If, on the date of death, the contract value is below the total premiums paid, net of withdrawals, the insurer pays the difference to the beneficiary. Variants exist: a roll-up floor, guaranteeing premiums uplifted at a fixed rate, or a ratchet floor, guaranteeing the highest value reached on an anniversary date. The guarantee has a cost, usually deducted monthly from savings as a death risk charge calculated on the gap between floor and value, the insured's age and the mortality table. It is often capped in amount and limited to an age, 75 or 80, beyond which it ends. For the insurer, it combines mortality risk and market risk: losses arise when a death coincides with a market fall, which makes it a put option on the contract value exercised on death. US variable annuities carry the same guarantee on a large scale, and their hedges proved very costly for insurers during the 2008 crisis.
Hypothetical case: a 68-year-old insured has paid 150,000 euros into a unit-linked contract with a guaranteed minimum death benefit. She dies after a market fall, when her contract is worth only 118,000 euros: the insurer pays 150,000 euros to her son, 32,000 of it under the guarantee.
GMDB, guaranteed minimum death benefit, death benefit floor
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