The Impact of Taxation on GMWB Contract in a Stochastic Interest Rate Framework
Modeling taxation in GMWB Variable Annuities has been frequently neglected but accounting for it can significantly improve the explanation of the withdrawal dynamics and lead to a better modeling of the financial cost of these insurance products. The importance of including a model of taxation has first been observed by Moenig and Bauer while considering the Black-Scholes model to describe the underlying security. Anyway, GMWB are long term products and thus accounting for stochastic interest rate has a relevant impact on both the financial evaluation and the policy holder behavior, as observed by Gouden\`ege et al.. In this paper we investigate the impact of these two elements together on GMWB evaluation. To this aim we develop a numerical framework which allows one to efficiently compute the fair fee value of a contract. Results show that accounting for both taxation and stochastic interest rate has determinant effects on the behavior of the policy holder and on the cost of GMWB contracts.