annuity presentation guide 2010
DESCRIPTION
Generic, mythbusting description of how equity indexed annuities really work.TRANSCRIPT
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.
Understanding Annuities
Index Value
or
Cash Accumulation
Value
Personal Pension
or
Lifetime Income
Value
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:
Annuities Have Two Components
Index Value or Cash Accumulation Value Component
1. The Bonus and Annual Lock In
$100,000
$110,000
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 taken prior to age 59 ½.
10% Bonus
Your value is locked in immediately upon premium payment and credit of bonus.
1 2 3 4 5 6
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.
Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
2. Choosing the Guaranteed Interest Rate Option
$100,000
$110,000
10% Bonus
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%
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 taken prior to age 59 ½.
1 2 3 4 5 6Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
$100,000
$110,000
S&P 500
10% Bonus
Crediting Formula
Monies linked to the index will increase in value when the market increases in value.
3. Choosing to Link Your Money toa 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.
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 taken prior to age 59 ½.
1 2 3 4 5 6Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
4. If the Market Declines the Value of Your Annuity Cannot Go Down
$100,000
$110,000
10% Bonus
There are no losses due to market declines.
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.
S&P 500
Crediting Formula
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 taken prior to age 59 ½.
1 2 3 4 5 6Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
5. Automatically Lock In Your Account Gains Each Year
$100,000
$110,000
10% Bonus
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
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 taken prior to age 59 ½.
1 2 3 4 5 6Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
6. Your Annuity Will Work This WayFor the Life of the Contract
$100,000
$110,000
10% Bonus
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
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 taken prior to age 59 ½.
1 2 3 4 5 6Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
7. Downside Protection and Peace of Mind Linked to Upside Growth
$100,000
$110,000
10% Bonus
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
sustains a positive contract value increase which can never be lost in the future.
Break Even
Positive Gain
S&P 500
Crediting Formula
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 taken prior to age 59 ½.
1 2 3 4 5 6Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
Index Value or Cash Accumulation Value
Personal Pension orLifetime 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
Component Summary
*A 10% federal tax penalty may apply to withdrawals taken prior to age 59 ½. **May vary by product and state
Personal Pension or Lifetime Income Value Component
$100,000
$110,000
10% Bonus
8. Many Annuities Have a “Personal Pension” Alternative
This is called a Lifetime Income Rider (LIR). The LIR utilizes a bookkeeping
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
this example the guaranteed income account grows at 8% per year.
8%
8%
8%
8%
8%
8%
S&P 500
Crediting Formula
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 taken prior to age 59 ½.
1 2 3 4 5 6Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.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.
10% Bonus
$100,000
$110,000
9. Use the Guaranteed Income Account to Calculate Your Lifetime Pension Income
8%
8%
8%
8%
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
rider typically .45% - .5% .The fee is always deducted from
your index value.
Guaranteed Income Account
Value is $149,654 x .06% =
$8,979 per year for life
S&P 500
Crediting Formula
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 taken prior to age 59 ½.
1 2 3 4 5 6Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.*Excess withdrawals may impact the amount of lifetime income or deplete income stream.
$100,000
$110,000
10. Withdrawals from Your Annuity Deducted From Your Index Value
Break Even
8%
8%
Index Value or
Cash 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.
10% Bonus
S&P 500
Crediting Formula
$8,979 per year for life
8%
8%
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 taken prior to age 59 ½.
1 2 3 4 5 6Hypothetical example for illustration purposes only. Each product works differently. See product specific brochures and disclosures for more information.
Index Value or Cash Accumulation Value
Personal Pension orLifetime Income Value
Market Down = No LossesGuaranteed Income Account Growth
Rate of 4% to 8%
Market Up = Market Linked
Interest IncreaseCreate a Lifetime of Income
Potential Principal Bonus Does Not Give Up Annuity Cash Value
Lock in Account Value Yearly Potential Annual Fee of .45% - .50%
Fixed Interest AlternativeIncome Account Value for Calculating
Lifetime Income Payments
10% Penalty Free Withdrawals*
Potential Surrender Charges
Terminal Illness/Nursing Home Rider**
Lawsuit Protection (Check Your State)
No Yearly Administrative Fees
Component Summary
*A 10% federal tax penalty may apply to withdrawals taken prior to age 59 ½. **May vary by product and state
The Pros and Cons of Fixed Index Annuities
Safe and insured financial product
Tax Deferred Accumulation
10% Penalty Free Withdrawals
Terminal Illness and Nursing Home Riders
Lawsuit Protected in Many States
Some Annuity Products May be Medicaid Friendly
No Administrative or Management Fees
Potential Length of Contracts
Potential Surrender Charges for Early
Access
Often Misunderstood with Variable
Annuities
.5% Fee for Lifetime Income Benefit Rider
Pros Cons
Options Can be Complex
How Do Insurance Companies Do It?
Insurance Company offers a
guaranteed Fixed Interest of 3%
or $3,000 for the year.
You elect not to take the
guaranteed interest preferring to
link your funds to a market
index in hope of greater gain.
You purchase a Fixed Index
Annuity for $100,000.
The Insurance Company takes
the $3,000 that it would have
given you and buys an S&P
Institutional Call Option.
The Insurance Company has
spent the same amount of money
it had planned to spend within its
original profit structure.
If the S&P goes up the Insurance
Company exercises the option
and credits you with interest
based on the option purchased.
If the S&P goes down the
Insurance Company cannot
exercise the option and loses
the $3,000 option purchase price.
You do not suffer any losses
since your monies were not
invested in the market. You,
however, do not make any
gains that year.
This is a hypothetical example for illustration purposes only