Understanding Fixed Index Annuities

1. Understanding Fixed Index Annuities

2. Agenda • Why FIAs • How They Work • Understanding the Annuity Owner • Prospecting

3. Why FIAs • Individuals Must Fund Their Retirement • Decline in Defined Benefit Plans • Social Security Uncertainty • Increase in Defined Contribution Plans • Individual generally must select • Individual must choose investments • Income based on performance • Deferred Annuities have become a “Go To” Retirement Savings Vehicle

4. Why FIAs • Annuities Offer Retirement Planning Benefits • Tax deferred growth • Various types of guarantees • Can derive an income guaranteed for life* • The original categories of Deferred Annuities: • Fixed • Variable * If a life contingent option is chosen

5. Why FIAs • Fixed Annuities • Fixed Rate of Return • Set by Company • Guaranteed Minimum Rate • Guarantee of Principal • Subject to surrender charges • Subject to Inflation Risk • Variable Annuities • Return based on Performance of Subaccounts • May have a fixed account • May have a guarantee against loss in the event of death • Can address Inflation Risk • Subject to Market Risk – No Principal Guarantee

6. Why FIAs • FIAs are a combination of many of the desired features or both Fixed and Variable Annuities: • Growth Based on the Performance of an Index • Protection from Market Losses • Guarantee of Principal • May be subject to surrender charges • Locked in Interest Earnings at Various Points in Time • Provide a Hedge Against Inflation

7. How FIAs Work • Definitions • Crediting Strategies • FIA Riders • Liquidity Options • Bonuses • Fees and Expenses

8. How FIAs Work • Definitions: • Market Index • Indexing Method • Index Term • Participation Rate • Cap Rate • Spread Rate (Margin Rate) • Floor • Uncapped Strategy

9. Definition: Market Index An index that measures the price changes of a large, overall market, such as the S&P 500.

10. Definition: Indexing Method • The calculation applied to the change in the index to determine the interest crediting rate applied to the annuity. Dividends are excluded. • Examples: • A Point to Point • Monthly Sum • Monthly or Daily Averaging • Annual Reset (Ratchet) • High Water Mark

11. Definition: Index Term The period over which index change is measured and the index-linked interest is calculated and credited to the annuity.

12. Definition: Participation Rate The participation rate determines how much of the increase in the index will be credited to the annuity. It is expressed as a percentage – for example 60%. If the increase in the index is 10%, 6% will be credited.

13. Definition: Cap Rate The Cap Rate is the maximum amount of interest the annuity can earn. Example: Change in Index = 10% Participation Rate = 60% Cap Rate = 5% Amount credited to the annuity = 5%

14. Definition: Spread Rate The Spread or Margin rate is an amount of interest that is subtracted from the change in Index. This fee may also be called an administrative fee and can be used separately or in conjunction to a cap or participation rate. Example: Change in Index = 10% Spread = 2% Amount Credited to the Annuity: 8%

15. Definition: Floor A contract may provide a floor. This is the minimum guaranteed interest rate that will be credited to the annuity. The floor is based on the claims paying ability of the issuing insurance company.

16. Definition: Uncapped Strategy This is a new type of strategy where there is no cap on the change in index rate paid. Often to participate in this type of strategy, the insurance company will require a specified amount to be invested in a fixed account.

17. How FIAs Work: Crediting Strategies • Point to Point • Monthly Sum • Monthly or Daily Averaging • Annual Reset (Ratchet) • High Water Mark

18. Strategy: Point to Point The change in the index is calculated from two points in time. Any change is impacted by any participation, cap or spread rate. The change is then credited to the annuity at the end of the crediting period and sets a new value for the annuity. Can be an Annual Point to Point or a Term End Point. A Term End Point is the same as an Annual Point to Point with the interest change credited after the end of a certain term typically 3 – 10 years.

19. Example: Point to Point

20. Strategy: Monthly Sum The change in the index is calculated each month and both positive (impacted by participation rate, cap rate or spread rate) and negative changes (not reduced by cap rate) are added up at the end of the term. If the sum is positive, it will be credited to the annuity at the end of the term. If the change is negative, no interest is credited, but the annuity value is not reduced.

21. Example: Monthly Sum

22. Strategy: Monthly or Daily Averaging The value of the index is recorded on a daily or monthly basis, and the index-linked interest is calculated as the difference between the average of the daily or monthly values over the course of the term and the index value at the start of the term, subject to participation rate, cap rate and or spread rate.

23. Example: Monthly or Daily Averaging

24. Strategy: High Water Mark The index value is recorded at various times over the course of the term (usually on annual anniversaries). Interest is then based on the difference between the highest index value and the index value at the start of the term. Interest is credited at the end of the term.

25. Example High Watermark

26. FIA Riders • Death Benefit • Long Term Care • Guaranteed Lifetime Withdrawal Benefit

27. Riders: Death Benefit • Basic – Pays full account value at death • Enhanced • Annual Increase – Guarantees death benefit grows by a specified percentage each year regardless of performance • May combine an income stream with Annual Increase

28. Riders: Long Term Care • Provides the flexibility of having access to a portion of the annuity’s principal to pay for long term care expenses without any applicable surrender charges.

29. Riders: Guaranteed Lifetime Withdrawal Benefit • Provides an annual withdrawal throughout the owner’s lifetime, without the need to annuitize the contract • Payments continue even if account value decreases or is zero

30. Liquidity Options • Withdrawals • Free Withdrawal • May offer a percentage that can be withdrawn without incurring any surrender charges • Systematic Withdrawals • Provides a specified amount at regular intervals until the account value is exhausted • Lump Sum Distributions For non-qualified contracts, interest will come out first, subject to ordinary income and potentially a 10% penalty.

31. Liquidity: Annuitization Annuitization: A systematic liquidation of principal and interest. • Life Only • Life and Period Certain • Life and Refund • Joint Life Options • Period Certain

32. Annuitization: Life Only Payments are made as long as the annuitant is alive. At death payments cease. No guarantees. Pays the highest income amount.

33. Annuitization: Life and Period Certain Payments will be made for a specified time or for the annuitant’s lifetime, whichever is longer. If the annuitant dies prior to the specified time person, payments will continue to a designated beneficiary until the specified period is over.

34. Annuitization: Life and Refund Payments will be made for the life of the annuitant. If the annuitant dies before the original premium has been paid out, the balance will be paid to a designated beneficiary. Can be lump sum (“Cash Refund”) or installments depending on the contract options.

35. Annuitization: Joint Life Payments will be calculated and made over 2 lives. The amount paid to the survivor may be 100% , 67% or 50%. May also add a guarantee such as period certain or refund if contract offers.

36. Annuitization: Period Certain Will pay the entire amount of the contract over a set period of time regardless of whether or not the annuitant lives to the end of the term. If the annuitant dies prior to the end of the term, the balance of payments will be made to a designated beneficiary.

37. Bonuses • Premium • Guaranteed Lifetime Withdrawal Benefit • Annuitization

38. Bonuses: Premium A percentage of premiums paid is credited to the annuity at issue. There may be a higher or longer surrender charge or higher fees to offset the cost of providing the credit.

39. Bonuses: GLWB If the Guaranteed Lifetime Withdrawal Benefit is utilized, an additional percentage is added to the base from which withdrawals are taken

40. Bonuses: Annuitization Similar to the GLWB bonus, if the contract is annuitized, an additional percentage is added to the contract from which the annuitization is calculated.

41. Fees and Expenses • Surrender Charges • Market Value Adjustment • Optional Benefit Charges • Margin, Spread or Administrative Fee • Maintenance Fee

42. Fees: Surrender Charges A percentage charge against premiums (or value of the annuity) in the event that the contract or a portion of the contract is surrendered prior to the end of the surrender charge period. Oftentimes there is a free withdrawal amount that can be accessed without the charge. In general the percentage of surrender charge declines over time. Note: The surrender charge and free withdrawal is a contract based charge. Taxes may still apply to the extent that the withdrawal is included in gross income.

43. Fees: Market Value Adjustment An adjustment to the surrender charge. May be positive or negative depending on prevailing rates at the time of surrender. In general, if interest rates are lower at the time of surrender, the surrender charge may be reduced, if interest rates are higher at the time of surrender, the surrender charge may be increased.

44. Fees: Optional Benefit Charges In general, if additional benefits are added to the contract, a additional fee may be charged to offset the cost of providing the rider by the insurance company

45. Fees: Margin, Spread, Administrative The Spread or Margin rate is an amount of interest that is subtracted from the change in Index. The key difference between a Spread and other types of fees is that a Spread is not charged to a policy if there is not enough crediting performance in the contract to cover the cost of the spread. A Spread may also be called an “Administrative Fee” and can be used separately or in conjunction to a cap or participation rate.

46. Fees: Maintenance May also be called a contract fee. Generally a small annual dollar amount. ($25 etc.)

47. Parties to the Contract • Owner • Annuitant • Beneficiary • Insurance Company

48. Party: Owner The owner is the “boss” of the annuity. They make all the decisions involving the annuity such as how to how much to invest, what index to choose, if there will be any riders. The owner also decides who the annuitant and beneficiary will be.

49. Party: Annuitant The annuitant is the measuring life in the annuity. It is on the annuitant’s life that will annuity payments will be based. The owner and annuitant may be the same person or they may be different individuals.

50. Party: Beneficiary The beneficiary is the individual who has the right to receive the proceeds of the contract in the event of the death of the owner or annuitant. Once annuity payments begin, if the annuitant dies, if there is any post death payment to be made (based on the annuity option chosen), the beneficiary will receive that payment.