income strategies with annuities

Income Strategies

with Annuities

The environment for annuities

Systematic withdrawal

Annuitization

Income hybrids of the future

Agenda

The EnvironmentThe Environment

The avoidance of taxes isthe only intellectual pursuitthat still carries any reward.

– John Maynard Keynes (1883–1946)

THE IRS

THEIRS

Annuity sales rising

Increased popularity of variableproducts

Exploitation of annuity “pitfalls”

Investor concerns

Current Environment

People are living longer

Doubts about Social Security

Pension plans are less common

Costs are rising

Markets don’t grow to the sky

A Dose of Reality

Financial asset values have risenat rapid rates

Need for more efficient incomeand wealth transfer

Fund and stock assets seen as better wealth-transfer vehicles

Invincible or Vulnerable?

The focus has beenon accumulation

The focus should beon income

The focus should beon income

Inflation

Health care issues

Unexpected expenses

Outliving the income stream

Income Concerns

Systematic withdrawals

Bonds

CDs

Money markets

Annuities

Income Tools

Structuring Income

Capital Assets

Annuities

Qualified Assets

Intended for financial advisers only.

Annuities are meantto be spent!

Systematic withdrawals from annuities

Systematic withdrawals from annuities

Flexibility

Perceived liquidity

Remaining value appears each month on client statement

Assets stay on adviser’s book

Systematic Withdrawal

Advantages

No apparent tax benefits

No income guarantees

Over-aggressive increases in income could deplete principal

Potential of outliving your income

Limitations

Systematic Withdrawal

The method of choicefor annuity income

Systematic Withdrawal

The “A” WordThe “A” Word

Annuitization

Income never changes

You cannot stop or adjust it

Insurance company keeps the money at death

“Dead” money on adviser’s books

Perception or Reality?

Tax-advantaged withdrawals

Income a client cannot outlive

Client “customization” of their income stream

Fixed or variable payments

Annuitization

Advantages

Difficult to understand

Loss of control

Loss of liquidity

Statements are replaced by checks

Adviser discomfort

Annuitization

Limitations

Insurance Company

Guarantees

Income

Single-life options

Joint-life options

Non-life options

Annuitization

Single life only

Single life with period certain

Single life with refund feature

Single-Life Options

Annuitization

Joint life only

Joint life with period certain

Joint life with reduced payment to survivor

Joint life with “pop-up” provision

Joint-Life Options

Annuitization

Designated period certain Designated amount

– Fixed payout only 3 to 30 years

Non-Life Options

Annuitization

Fixed, variable or combination

Monthly, quarterly, semi-annual or annual payments

Made by check or electronic funds transfer (EFT)

Flexibility

Annuitization

• Male, age 70• Single-life only option and 10 years period certain• American Legacy Growth-Income Fund• $200,000 account value and

cost basis

Case Study #1

American Legacy III Growth-Income Fund Historical Variable Payout$200,000 cost basis with variable annuitization payments beginning 03/84

$5,578

$1,292

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

03/84 03/85 03/86 03/87 03/88 03/89 03/90 03/91 03/92 03/93 03/94 03/95 03/96 03/97 03/98 03/99 03/00 03/01 03/02

Date

Mo

nth

ly B

en

efi

t

Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

Tax Efficiency

Cumulative Tax Excludable

Cumulative Income

Tax Excludable

Monthly IncomeDate

Mar ’84 $1,292 $927 $1,292 $927Mar ’89 $2,153 $927 $112,870 $56,551Mar ’94 $2,903 $927 $268,367 $112,176Mar ‘02 $5,578 $0 $713,890 $200,000

Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

Female, age 65

Concerns:– Spending assets efficiently– Not outliving income– Leaving something to heirs

Case Study #2

Jan ’97 $2,129 $2,129 $427,909Jan ’99 $2,846 $62,690 $503,723Jan ’00 $3,005 $98,327 $495,883Jan ’02 $3,000 $170,721 $423,009

A Story of Growing Income

Value of Unit Refund

Cumulative Income

Monthly IncomeDate

$200,000 invested in 1987in American Legacy Growth-Income Fund. Systematic withdrawals begin 1992. Account value is $430,038 inJanuary 1997 when annuitization life with refund option payments begin.

Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

• Husband and wife, age 60• Newly retired, no pension plan, rollover assets• $200,000 joint with pop-up,

American Legacy Growth-Income Fund• Concerns:

– Outliving income

Case Study #3

Joint and survivor with pop-up provision

Mar ‘84 $9,908 $9,908Mar ‘89 $16,439 $16,439Mar ‘94 $22,121 $26,926Mar ‘95 $22,497 $27,384Mar ‘02 $41,375 $50,361

Annual Incomewith Pop-upAnnual IncomeYear

$200,000 American Legacy Growth-Income Fund. Annuitization begins in 3/84.

Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

Income HybridsIncome Hybrids

New enhancements and product innovations in development

Geared for annuity owners needing more income flexibility

Combines the best features of annuity-income alternatives

Income Hybrids

• Tax-advantaged withdrawals• Payments guaranteed for life • Increased liquidity and flexibility• Access to additional cash• Monthly statement reporting and daily account values

The Benefits

Automatic portfolio re-balancing

Ongoing re-allocation of assets

Dollar cost averaging*

Performance reporting

Assets under management

*This investment method involves continuous investment in securities and does not guarantee a profit. Investors should consider their financial ability to continue purchasing through all price levels.

The Benefits

• Male, age 60• Concerns:

– Wants to spend assets efficiently

– Access to additional income

– Keeping pace with inflation and participating in market performance

Case Study #4

1984 $0 $10,3031987 $0 $18,1761988 $50,000 $15,8381989 $0 $14,0581991 $0 $15,8912001 $0 $34,052

Customized Income Solution

Avg. Annual IncomeWithdrawalYear

$200,000 American Legacy Growth-Income Fund. Annuitization begins 4/84.

Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

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Summary

Annuities are meantto be spent!

What should you do?

• Talk to your clients• Explore their income needs and wealth-transfer

concerns• Consider the many ways annuities can help them meet

those needs

American Legacy III Growth-Income Fund

10 years 5 years 12 months

+12.11% +11.38% +5.82%

Average annual compound returns through March 31, 2002, with all distributions reinvested

Results reflect payment of the appropriate contingent deferred sales charge (CDSC), which starts at 6% for the first two years and declines to 0% after the seventh year.The CDSC is waived for certain withdrawals as described in the prospectus. Results also reflect deduction of all fund and contract expenses, including a 0.25% distribution fee, a 0.10% administrative fee and a 1.30% mortality and expense risk charge, which includes the 0.15% charge for the optional enhanced guarantee minimum death benefit (EGMDB), If the EGMDB was not in effect, the results would be higher. Figures shown are past results and are not predictive of future results. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity. Unit price and return will vary, so investors may lose money.

This presentation is intended for financial advisers. Investors seeking more information about any of the American Legacy variable annuities or American Funds Insurance Series, including risks, charges and expenses, should obtain the applicable prospectuses from their financial adviser and read them carefully before investing or sending money.

If income results are presented, this presentation is authorized for use with prospective investors only when preceded or accompanied by the current prospectus for the fund(s) being offered.

If investment results are presented, this presentation must be accompanied by the most recent American Funds Group and American Legacy Variable Annuities Quarterly Statistical Update.

All results reflect appropriate charges and expenses for American Legacy III.

Securities offered through and annuities issued by The Lincoln National Life Insurance Company, Fort Wayne, IN.