Annuity Presentation Guide 2010
- 1. Understanding Annuities Annuities can be complex if not understood. Like every product, however, they have both pros and cons that need to be discussed. We’ll help review them together in an easy to understand manner.
- 2. Annuities Have Two Components When you purchase many kinds of Fixed Index Annuities you get two components that simultaneously work together. The Index or Cash Value is the accumulation value of your annuity. This value is based on the interest that is credited to your annuity based on the rise and fall of the market. The second component is a book- keeping component that grows each year at a guaranteed rate of interest and may be turned into a lifetime stream of income at some future date. Let’s see how each of these components work: Index Value Personal Pension or or Cash Accumulation Lifetime Income Value Value
- 3. Index Value or Cash Accumulation Value Component
- 4. 1. The Bonus and Annual Lock In Many Fixed Index Annuities provide bonuses. Suppose you get a 10% bonus and deposit $100,000 in your annuity. The value of your annuity will then be $110,000 and it will be locked in at that level. As your annuity rises in value, each new higher value is locked in each year at the anniversary date. Once locked in that amount is guaranteed and cannot decrease in value. Your value is locked in immediately upon premium payment and credit of bonus. $110,000 10% Bonus $100,000 All guarantees are based on the claims paying ability of the insurance company Participation rates will vary. A 10% federal tax penalty may apply to withdrawals 1 2 3 4 5 6 taken prior to age 59 ½. Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
- 5. 2. Choosing the Guaranteed Interest Rate Option The insurance carrier will offer you a fixed, guaranteed interest rate in the first year and every year thereafter which you may choose to take. In this example, suppose the guaranteed interest rate is 3.5%. Even if the market declines, you will earn 3.5%. If you include the bonus of 10% in calculating the first year interest rate of your annuity, that would be a guaranteed first year return of 13.5%. By taking the guaranteed interest rate for the first year, the total guaranteed first year return including the 10% bonus is 13.5% $110,000 10% Bonus $100,000 All guarantees are based on the claims paying ability of the insurance company Participation rates will vary. A 10% federal tax penalty may apply to withdrawals 1 2 3 4 5 6 taken prior to age 59 ½. Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
- 6. 3. Choosing to Link Your Money to a Market Index, Like the S&P 500 It is important to remember that your monies are not invested in the S&P 500 but linked through a formula called a Crediting Formula. It is this formula that will determine the interest credited to your annuity when the market index increases in value. In most cases there will be a cap or limit and the interest credited to your annuity may not be as much as the market gain. Many people feel that the protection against losing money is a good tradeoff for possibly not getting an equivalent of the index gains. S&P 500 Monies linked to the index will increase in value when the market increases in value. Crediting Formula $110,000 10% Bonus $100,000 All guarantees are based on the claims paying ability of the insurance company Participation rates will vary. A 10% federal tax penalty may apply to withdrawals 1 2 3 4 5 6 taken prior to age 59 ½. Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
- 7. 4. If the Market Declines the Value of Your Annuity Cannot Go Down Because your monies are not invested in the market, a decline in the value of the index to which it is linked will not effect the contract value. In a declining market you will not be credited any interest but you will have the peace of mind of knowing that you will not lose any money. There are no losses due to market declines. S&P 500 Crediting Formula $110,000 10% Bonus $100,000 All guarantees are based on the claims paying ability of the insurance company Participation rates will vary. A 10% federal tax penalty may apply to withdrawals 1 2 3 4 5 6 taken prior to age 59 ½. Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
- 8. 5. Automatically Lock In Your Account Gains Each Year In a Fixed Index Annuity, interest earned can never be lost due to any decline of the stock market and the corresponding index to which your annuity is linked. Each new, higher value of your annuity establishes a new high watermark which is locked in on your anniversary date. New High Watermark Locked In Value S&P 500 Crediting Formula $110,000 10% Bonus $100,000 All guarantees are based on the claims paying ability of the insurance company Participation rates will vary. A 10% federal tax penalty may apply to withdrawals 1 2 3 4 5 6 taken prior to age 59 ½. Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
- 9. 6. Your Annuity Will Work This Way For the Life of the Contract As the market and Index continue to rise and fall, your annuity will be credited with interest with each rise in the market, establishing a new high watermark locked in value at each anniversary date. When the market declines there will be no loss of value whatsoever. New High Watermark Locked In Value S&P 500 Crediting Formula $110,000 10% Bonus $100,000 All guarantees are based on the claims paying ability of the insurance company Participation rates will vary. A 10% federal tax penalty may apply to withdrawals 1 2 3 4 5 6 taken prior to age 59 ½. Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
- 10. 7. Downside Protection and Peace of Mind Linked to Upside Growth In this simple illustration the person who is invested in the market lived through a roller coaster of ups and downs and finally broke even. On the other hand, the person in the Fixed Index Annuity was free from stress of trying to figure out the market, what to buy, and when to buy it, and Positive sustains a positive contract value increase which can never be lost in the future. Gain S&P 500 Crediting Formula $110,000 Break Even 10% Bonus $100,000 All guarantees are based on the claims paying ability of the insurance company Participation rates will vary. A 10% federal tax penalty may apply to withdrawals 1 2 3 4 5 6 taken prior to age 59 ½. Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
- 11. Component Summary Index Value or Personal Pension or Cash Accumulation Value Lifetime Income Value Market Down = No Losses Market Up = Market Linked Interest Increase Potential Principal Bonus Lock in Account Value Yearly Fixed Interest Alternative 10% Penalty Free Withdrawals* Potential Surrender Charges Terminal Illness/Nursing Home Rider** Lawsuit Protection (Check Your State) No Yearly Administrative Fees *A 10% federal tax penalty may apply to withdrawals taken prior to age 59 ½. **May vary by product and state
- 12. Personal Pension or Lifetime Income Value Component
- 13. 8. Many Annuities Have a “Personal Pension” Alternative This is called a Lifetime Income Rider (LIR). The LIR utilizes a bookkeeping 8% account that grows your monies at a specified guaranteed interest rate each year which then may be converted into a lifetime of guaranteed income. In 8% this example the guaranteed income account grows at 8% per year. 8% S&P 500 8% 8% Crediting Formula 8% $110,000 10% Bonus $100,000 All guarantees are based on the claims paying ability of the insurance company Participation rates will vary. A 10% federal tax penalty 1 2 3 4 5 6 may apply to withdrawals Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information. taken prior to age 59 ½. Income Account varies by product and is only used to calculate lifetime payments and not available as a lump sum, cash surrender, or part of the death benefit calculation.
- 14. 9. Use the Guaranteed Income Account to Calculate Your Lifetime Pension Income To calculate the income stream, multiply the guaranteed income account value by a factor based on your age e.g. 6% if you are between 70 and 80. That amount is then guaranteed as long as you live*. If you pass away, your beneficiaries will receive the cash remaining in your Index Account. There is a small fee for this Guaranteed Income Account rider typically .45% - .5% .The fee is always deducted from Value is $149,654 x .06% = your index value. 8% $8,979 per year for life S&P 500 8% 8% Crediting Formula 8% $110,000 10% Bonus $100,000 All guarantees are based on the claims paying ability of the insurance company Participation rates will vary. A 10% federal tax penalty 1 2 3 4 5 6 may apply to withdrawals Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information. taken prior to age 59 ½. *Excess withdrawals may impact the amount of lifetime income or deplete income stream.
- 15. 10. Withdrawals from Your Annuity Deducted From Your Index Value As income is withdrawn from your annuity the Index or Cash Accumulation Value is reduced. The amount of reduction may be replaced by interest credited based on the rises of the corresponding index. The LIBR income stream continues for life no matter the amount the value of the Index or Cash Accumulation Value, even if it were to go to zero. $8,979 per year for life 8% S&P 500 8% Index Value or 8% Cash Crediting Value Formula 8% $110,000 Break Even 10% Bonus $100,000 All guarantees are based on the claims paying ability of the insurance company Participation rates will vary. A 10% federal tax penalty 1 2 3 4 5 6 may apply to withdrawals taken prior to age 59 ½. Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
- 16. Component Summary Index Value or Personal Pension or Cash Accumulation Value Lifetime Income Value Guaranteed Income Account Growth Market Down = No Losses Rate of 4% to 8% Market Up = Market Linked Create a Lifetime of Income Interest Increase Potential Principal Bonus Does Not Give Up Annuity Cash Value Lock in Account Value Yearly Potential Annual Fee of .45% - .50% Income Account Value for Calculating Fixed Interest Alternative Lifetime Income Payments 10% Penalty Free Withdrawals* Potential Surrender Charges Terminal Illness/Nursing Home Rider** Lawsuit Protection (Check Your State) No Yearly Administrative Fees *A 10% federal tax penalty may apply to withdrawals taken prior to age 59 ½. **May vary by product and state
- 17. The Pros and Cons of Fixed Index Annuities Pros Cons Safe and insured financial product Potential Length of Contracts Tax Deferred Accumulation .5% Fee for Lifetime Income Benefit Rider 10% Penalty Free Withdrawals Potential Surrender Charges for Early Access Terminal Illness and Nursing Home Riders Often Misunderstood with Variable Annuities Lawsuit Protected in Many States Options Can be Complex Some Annuity Products May be Medicaid Friendly No Administrative or Management Fees
- 18. How Do Insurance Companies Do It? You elect not to take the Insurance Company offers a You purchase a Fixed Index guaranteed interest preferring to guaranteed Fixed Interest of 3% Annuity for $100,000. link your funds to a market or $3,000 for the year. index in hope of greater gain. The Insurance Company takes If the S&P goes up the Insurance If the S&P goes down the the $3,000 that it would have Company exercises the option Insurance Company cannot given you and buys an S&P and credits you with interest exercise the option and loses Institutional Call Option. based on the option purchased. the $3,000 option purchase price. You do not suffer any losses The Insurance Company has since your monies were not spent the same amount of money invested in the market. You, it had planned to spend within its however, do not make any original profit structure. gains that year. This is a hypothetical example for illustration purposes only