Variable Annuities. A tax-advantaged way to save for retirement

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1 Variable Annuities A tax-advantaged way to save for retirement

2 Variable annuities What you should know Variable annuities have become a part of the retirement and investment plans of many Americans. Before you buy a variable annuity, you should know some of the basics and be prepared to ask your insurance agent, broker, financial planner or other financial professional lots of questions about whether a variable annuity is right for you. Variable annuities combine tax-deferral advantages with the potential for growth and capital appreciation. They can also guarantee a retirement income you can t outlive. Any guaranteed death benefit, payment of lifetime income and optional living benefits are based on the claims-paying ability of the issuing company. Guarantees do not apply to the investment performance or the safety of amounts held in the underlying subaccounts. Think of variable annuities as long-term investments that are designed to help you save for long-range goals, such as retirement. Variable annuities are not suitable for meeting short-term goals because substantial taxes and insurance company charges may apply if you withdraw your money early. 1 This brochure provides a general description of variable annuities what they are, how they work and the charges you will pay. Before buying any variable annuity, you should learn more about the particular annuity you are considering. Request a prospectus from the insurance company or from your registered representative and read it carefully. The prospectus contains important information about the annuity contract, including fees and charges, investing options, death benefits and annuity payout options. You should compare the costs and benefits of the annuity with other variable annuities and with other types of investments. 1 Liquidated earnings are subject to income tax and may be subject to a contingent deferred sales charge or a surrender charge. If taken prior to age 591 2, an additional 10% federal income tax may apply. NOT FDIC/NCUA INSURED NO BANK/CREDIT UNION GUARANTEE MAY LOSE VALUE NOT INSURED BY ANY GOVERNMENT AGENCY NOT A BANK/CREDIT UNION DEPOSIT OR OTHER OBLIGATION

3 What is a variable annuity? A variable annuity is a contract between the contract owner(s) and an insurance company, under which the insurer agrees to make periodic annuity payments to the annuitant, that may begin immediately or in the future. You may purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. In return for your purchase payments, the insurance company agrees to provide a regular stream of income (the annuity). A variable annuity typically offers a broad range of professionally managed investment choices spanning multiple asset classes and investment styles. Fixed accounts, which credit interest, may also be available. The value of your annuity contract can go up or down and sometimes dramatically depending on the performance of the underlying investments. Although diversifying your investment portfolio may help mitigate risk, there is no guarantee that a diversified portfolio will outperform a nondiversified portfolio, or that diversification among different asset classes will reduce risk. Diversification does not ensure a profit or protect against loss in a declining market. Beneficiary protection Most variable annuities offer a death benefit. If you die, the person you select as a beneficiary (such as your spouse or child) will receive the greater of the contract value or a specified amount. Example: You own a variable annuity that offers a death benefit equal to the greater of the contract value or the total purchase payments minus withdrawals. You have made purchase payments totaling $50,000. In addition, you have withdrawn $5,000 from your contract. Because of these withdrawals and some investment losses, your contract value is currently $40,000. If you die, your designated beneficiary will receive $45,000 (the $50,000 in purchase payments you made minus $5,000 in withdrawals). Optional living benefits Some variable annuities offer optional living benefits, which generally have extra charges or fees and investment restrictions. Living benefits are designed to help protect your investment and may help give you the confidence to stay focused on your long-term investment objectives. It s important to consider the financial strength of the insurance company that issues any variable annuity you are considering. The insurer s financial strength can affect the company s ability to pay any benefits that entail a guarantee, such as lifetime income, death benefits and any optional living benefits. 3

4 Important considerations Optional features cannot be elected without purchasing a variable annuity contract. The benefits may not be appropriate for investors who do not foresee a need for additional principal protection, lifetime income or death benefit protection and whose primary focus is tax deferral. Please be sure that the variable annuity contract is suitable for your investment goals before considering electing optional features. You may incur additional charges for each optional benefit provided by your variable annuity. Be sure that you understand the benefits and additional charges. Carefully consider whether you need the benefit. Receiving income A variable annuity can provide an income stream that is guaranteed for life, for a specific period of time or for a combination of both. 2 Annuities with lifetime income options are one of the few sources of retirement income that can guarantee income you can t outlive. Predictable income from an annuity can help supplement other forms of retirement income, such as Social Security benefits, or payments from a defined benefit pension plan. If the annuity was purchased with after-tax dollars, a portion of the annuity payments you receive will be tax-free, as taxes are only paid on the earnings portion of the annuity payment. 2 Guarantees are based on the claims-paying ability of the insurer. 4

5 How variable annuities work A variable annuity has two phases: the accumulation phase and the payout phase. The accumulation phase begins as soon as a purchase payment is applied to your contract. Each purchase payment applied to a variable annuity purchases accumulation units in the insurance company s separate account(s). These are divided into one or more subaccounts that invest in underlying variable product funds, including equity or bond-based funds that are available only with variable annuities. During the payout phase, your principal and earnings are paid out to you, based on the annuity option you chose. Most variable annuities offer a choice of annuity payment frequencies which may include monthly, quarterly, annual options. Tax deferral makes a difference 3 In a tax-deferred investment, your money grows faster because you re deferring taxes on your earnings until they are withdrawn, allowing that tax-deferred money to benefit from potential investment earnings. With a taxable investment, you pay taxes on your earnings each year, leaving you with less money to benefit from any investment earnings. In an annuity, you will pay taxes when you take a distribution, but at that point, you may be in a lower tax bracket. Important considerations Other investment vehicles, such as IRAs and employer-sponsored 401(k) plans, also may provide you with tax-deferred growth and other tax advantages. For most investors, it will be advantageous to make the maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity. Before investing, you may want to consult a tax adviser about the tax consequences of investing in a variable annuity. 3 Variable annuities do not provide any additional tax advantage when used to fund a qualified plan. Investors should consider buying a variable annuity to fund a qualified plan for the annuity s additional features, such as lifetime annuity payments, death benefit protection and living benefits, if applicable. 5

6 THE POWER OF TAX DEFERRAL $121,050 TAXABLE $169,318 TAX-DEFERRED Here s how a hypothetical $50,000 investment might accumulate, assuming a gross annual growth rate of 5% for 25 years and a 28% income tax bracket. This illustration is not intended to be a projection of future values and does not represent the performance of any Massachusetts Mutual Life Insurance Company (MassMutual) product. Variable annuities usually carry mortality and expense charges, administrative fees and, in some cases, sales charges and/or charges for optional benefits, if selected. These charges were not included; if they had been, the tax-deferred performance would have been lower. The performance would be further reduced by taxes upon annuitization or withdrawal. Withdrawals prior to age 59½ may be subject to an additional 10% federal income tax. This illustration assumes a 28% federal income tax rate and a gross annual growth rate of 5%. Note that lower maximum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the investments shown. Please consider your personal investment horizon and income tax bracket, both current and anticipated, when making an investment decision, as these may further affect the results of the comparison. 6

7 Fees and expenses You will pay several charges when you invest in a variable annuity. Be sure that you understand all the charges before you invest. These charges will reduce the value of your contract and the return on your investment. Generally, they will include the following: Contingent Deferred Sales Charge. A contingent deferred sales charge (CDSC), or surrender charge, may apply if you withdraw money from a variable annuity contract during a specified period of time. Generally, this period can be between five and eight years, but may be longer, depending on the contract. Generally, the CDSC is a percentage of the amount withdrawn, and declines gradually over a period of several years. Many contracts allow you to withdraw part of your contract value each year 10% of your contract value, for example without paying a surrender charge. Mortality and Expense (M&E) Risk Charge. This charge is equal to a certain percentage of your contract value, typically around 1.25% per year. This charge compensates the insurer for mortality risks it assumes under the annuity contract. It also compensates the insurer for the risk that the current charges will be insufficient to cover the actual cost of administering the contract. Administrative Fees. The insurer may deduct charges to cover recordkeeping and other administrative expenses. This may be charged as a flat contract maintenance fee (perhaps $25 or $30 per year) or as a percentage of your contract value (typically around 0.15% per year), or both. Underlying Fund Expenses. You will also pay the fees and expenses imposed by the fund companies for the underlying investment choices in your variable annuity. Fees and Charges for Optional Features. Special features offered by some variable annuities, such as living benefits, typically carry additional fees and charges. Other charges, such as initial sales loads or fees for transferring part of your contract from one investment choice to another, may also apply. You should ask your financial professional to explain all charges that may apply. You will also find a description of the charges in the prospectus for any variable annuity that you are considering. 7

8 Ask questions before you invest Financial professionals who sell variable annuities have a duty to advise you as to whether the product they are recommending is suitable to your particular investment needs. And, if the variable annuity is being used to fund an employer-sponsored qualified retirement plan or IRA, these financial professionals are held to the higher fiduciary standards of care. Don t be afraid to ask questions and take notes, so there won t be any confusion later as to what was said. Variable annuity contracts typically have a free look period, during which you can terminate the contract without paying any surrender charges and get back your purchase payments (which may be adjusted to reflect other charges and the performance of your investments). Before you decide to buy a variable annuity, consider the following: Will you use the variable annuity primarily to save for retirement or a similar long-term goal? Are you investing in the variable annuity through a retirement plan or IRA (which would mean that you are not receiving any additional tax-deferral benefit from the variable annuity)? Are you willing to accept the risk that your contract value may decrease if the contract's underlying investment choices perform negatively? Do you understand the features of the variable annuity? Do you understand all the fees and expenses that the variable annuity charges? Do you intend to remain in the variable annuity long enough to avoid paying any surrender charges if you have to withdraw money? Have you consulted a tax adviser and considered all the tax consequences of purchasing an annuity, including the effect of annuity payments on your tax status in retirement? If you are exchanging one annuity for another, do the benefits of the exchange outweigh the costs, such as any surrender charges you will have to pay if you withdraw your money before the end of the surrender charge period for the new annuity? You owe it to yourself to learn as much as possible about how variable annuities work, the benefits they provide and the charges you will pay before you decide to purchase one. 8

9 Common terms Accumulation phase Begins on the date the contract is issued and ends on the date the owner applies full contract value to an annuity option. Accumulation unit A unit of measure used to determine your value in a sub-account during the accumulation phase. Annuitant The person (may be the same as the contract owner) whose life expectancy is used to calculate the annuity payment. Annuitization The conversion of the accumulated value of an annuity into a stream of income, either for one or two lives or for a specific period of time. Guaranteed income payments are based on the claims-paying ability of the issuing company. Annuity date The date annuity payments begin. Beneficiary The person or entity the contract owner designates to receive the death benefit as provided in the contract. Contract value The sum of the values held in the sub-accounts during the accumulation phase. Owner The contract owner(s) is the person(s) who makes decisions about the annuity. The owner(s) has all the rights under the terms of the annuity, such as the right to make withdrawals from the annuity, surrender the contract or change the designated beneficiary and to make investment decisions. Payout phase The period that begins on the annuity date and ends with the last annuity payment. Purchase payment An amount paid to the issuer into the contract during the accumulation phase. 9

10 Your registered representative can help you review your individual circumstances income, goals, financial/retirement resources, age and investments to determine what type of annuity may be best for you. Consider the variable annuity s unique advantages no maximum investment, retirement income you cannot outlive, guaranteed death benefit, professional management of the underlying funds and diversification. You ll see why variable annuities are so popular in today s economic and tax environment. 10

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12 MassMutual Helping you secure what matters most. Since 1851, MassMutual has been building a reputation for financial strength and integrity. At MassMutual, we operate for the benefit of our customers. Our business decisions are based on a single guiding principle: to help people secure their future and protect the ones they love. Learn more at This material does not constitute a recommendation to engage in or refrain from a particular course of action. The information within has not been tailored for any individual. Before purchasing a variable annuity, you should carefully consider the investment objectives, risks, charges and expenses of the annuity. For this and other information, obtain the prospectus for the annuity from your registered representative. Please read the prospectus carefully before investing or sending money. You may also obtain the prospectuses (or summary prospectuses, if available) for the annuity s underlying investment choices from your registered representative. The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Annuity products are issued by Massachusetts Mutual Life Insurance Company (MassMutual) and C.M. Life Insurance Company. C.M. Life Insurance Company, Enfield, CT 06082, is nonadmitted in New York and is a subsidiary of Massachusetts Mutual Life Insurance Company, Springfield, MA Variable annuities are offered through registered representatives of MML Investors Services, LLC, Springfield, MA or a broker-dealer that has a selling agreement with MML Strategic Distributors, LLC, Springfield, MA Principal Underwriters: MML Investors Services, LLC and MML Strategic Distributors, LLC, subsidiaries of Massachusetts Mutual Life Insurance Company, Springfield, MA Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA All rights reserved. AN DOL -2, 3 CRN