Insured Gift Annuity Program IGAP

Transcription

1 Insured Gift Annuity Program IGAP The Six Bridges Group at Morgan Stanley Smith Barney NOT INTENDED FOR INDIVIDUAL DONOR USE Protecting Your Charitable Gift Annuity Program 1

2 Meet The Six Bridges Group The Six Bridges Group is a network of highly regarded professional consultants within Morgan Stanley Smith Barney. Dedicated to providing customized strategies for complex investment issues particular to the non-profit industry, The Six Bridges Group has access to the services of a leading global financial services firm and combine those resources with customized advice and a concierge level of personalized service. We focus on tactical solutions to your problems. 2

3 Mission Statement The Six Bridges Group at Morgan Stanley Smith Barney is dedicated to helping non-profit organizations maximize their charitable strategies. While we don t provide tax or legal advice, our charitable services provide simple, effective ways to support your organization s mission, maximize donations and support donor intent. 3

4 Solutions Asset Management Planned Giving Analysis Board of Directors Education Nonprofit Governance Issues Investment Policy Statement Development Specialized Programs for Charitable Gift Annuities Specialized Program for Scholarships Specialized Programs for Trusts Retirement Plans for Non-Profit Organizations Multiple Employer Program Tangible Personal Property Gifts Assistance Sale of Business Dependent Gifts Assistance Administration of Gifts and Donations Trust Administration Small Trusts are welcome Estate Planning Assistance 4

5 5 Tab One

6 Insured Gift Annuity Program IGAP 6

7 Insured Gift Annuity Program (IGAP) Transfers the Investment Risk Transfers the Longevity Risk Transfers the Interest Rate Risk Transfers the Administrative Burdens Transfers the Donor s Concerns 7

8 Transfers the Investment Risk* The Foundation will receive death benefit proceeds at the donor s passing. The death benefit proceeds are the greatest of: the account value; or the initial donation reduced by any withdrawals; or the maximum anniversary value on any year reduced by the withdrawals. *Please see disclosure on fees and details in the prospectus provided. 8

9 Transfers the Longevity Risk The insurance carriers used in this program provide an income stream to the charity for the life of the donor (annuitant). 9

10 Transfers the Interest Rate Risk* Guaranteed cash flow regardless of market conditions. Cash flow can go up, but can never go down. The charity has a stable, defined cash flow. Available annual reset may provide greater cash flow over the life of the donor. *Please see disclosure on fees and details in the prospectus provided. 10

11 Transfers the Administrative Burdens Preparation of all distributions to donor or charity. Individual CGA values available online updated daily. Individual CGA monthly statements provided to charity. Feasibility studies for potential CGA s. Viability audit of existing CGA portfolios. Dual audit trail. 11

12 Transfers Donor Concerns In today s environment, donors may have fears about the sustainability of a charity. Using this program can provide comfort in that the CGA is backed by a nationally known life insurance company. 12

13 Training Available for Development Staff We are available to provide training to staff to utilize CGA s where appropriate. We have relationships with marketing consultants to assist you with literature and other marketing needs. 13

14 14 Tab Two

15 IGAP Carrier Financial Strength Ratings* as of Carrier A. M. Best Fitch Moody s S&P SunAmerica A A- A1 A+ The Hartford A A- A3 A Lincoln National A+ AA A3 AA- Nationwide Life A+ N.A. A1 A+ Transamerica Life A AA A1 AA- *For a detailed explanation of the rating systems please see the last section important Disclosures. *Extracted from http: //annuityfyi.com/safety_ratings. html 15

16 Suggested Charitable Gift Annuity Rates ACGA Single Life Age Rate Age Rate Age Rate % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates Effective July 01, 2011 American Council of Gift Annuities 16

17 Annuities Terms Defined There are three parties associated with a commercial annuity contract: The Owner: In IGAP the owner of the annuity is the organization (or trust) that purchases the annuity contract. The Owner s powers include: Controls and owns the contract (an asset) Can contribute or withdraw funds and change investment allocations Can change the named beneficiary The Annuitant: In IGAP the annuitant is your donor. The annuitant is the person whose age and life expectancy determine the payments in the payout phase of the commercial annuity. The annuitant s death triggers the final death benefit payment (residuum) to the beneficiary. The Beneficiary: In IGAP the beneficiary is the organization to which the death benefit (if any) is paid. 17

18 Counting The Costs: Overview Because of their unique benefits, annuities typically have costs not associated with other investments. Costs cover: Contract administration expenses Management Costs associated with beneficiary protection and income options Pricing Structure B-Share: No sales charge. Surrender charge that declines each year you own the annuity. Bonus/Premium Enhanced: Offer credits on the amount you invest. Generally have higher mortality and expense (M&E) charges and longer surrender periods than B-share annuities. C-Share: No initial sales or surrender charges which provides immediate access to their investment funds without penalty. Also have higher M&E charges than B-share annuities. L-Share: Surrender charge period between 3 and 4 years. Initial M&E is typically higher than a B-share annuity but lower than a C-share annuity. 18

19 Fees* Associated with IGAP Carrier Name Mortality Charge Income Benefit Death Benefit (Standard /Optiona l) Average Investme nt Expense Ratio Genworth Annuity Company 1.70% 1.10% 0% /.20%.90% The Hartford 1.65% 1.15% 0% /.30%.90% Lincoln Insurance 1.65%.90% 0% /.25%.85% Nationwide Insurance 1.75% 1.00% 0% /.35%.85% Transamerica Insurance 1.65%.90% 0% /.20% 1.00% * B Share Contract * Please see the prospectus for a complete description of fees, charges and associated benefits. 19

20 20 Tab Three

21 A Case Study Meet Our Valued Donor Donor: 67 year old male Amount of Gift: $100,000 Date of Gift: ACGA* Distribution Rate: 5.5% annually (Single Life) *American Council of Gift Annuities *The following case study data was provided by SunAmerica. A complete copy of the illustration and a prospectus is provided.. The information provided is for informational purposes only. The following summary/statistics have been obtained from sources we believe to be reliable, but cannot guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. 21

22 Traditional Method YEAR AGE GIFT ANNUAL CGA WITHDRAWLS CGA MARKET VALUE ANNUAL MARKET RETURN (NET*) $100,000 $ 5,500 $ 94, $ 5,500 $ 118, % $ 5,500 $ 119, % $ 5,500 $ 122, % $ 5,500 $ 110, % $ 5,500 $ 127, % $ 5,500 $ 134, % $ 5,500 $ 150, % $ 5,500 $ 167, % $ 5,500 $ 196, % $ 5,500 $ 184, % $ 5,500 $ 157, % $ 5,500 $ 119, % $ 5,500 $ 129, % $ 5,500 $ 123, % $ 5,500 $ 117, % $ 5,500 $ 112, % $ 5,500 $ 109, % $ 5,500 $ 64, % $ 5,500 $ 62, % $ 5,500 $ 64, % TOTAL $ 115,500 $ 64,283 DONOR PASSES ON *Market Return Net of all applicable fees. ACGA Rates as of July 2011 Annual market returns (net) represent a diversified mutual fund portfolio of 60% equity and 40% fixed income. A detailed description of the portfolio is available upon request. 22

23 IGAP Method YEAR AGE GIFT ANNUAL CGA WITHDRAWLS CGA MARKET VALUE IGAP DEATH BENEFITS OR PROCEEDS ANNUAL IGAP WITHDRAWLS IGAP BENEFIT $100,000 $ 5,500 $ 94,500 $ 94,500 $ 6,000 $ $ 5,500 $ 118,672 $ 118,672 $ 7,132 $ 2, $ 5,500 $ 119,805 $ 119,805 $ 7,200 $ 3, $ 5,500 $ 122,884 $ 122,884 $ 7,385 $ 5, $ 5,500 $ 110,511 $ 110,511 $ 7,385 $ 7, $ 5,500 $ 127,470 $ 127,470 $ 7,660 $ 9, $ 5,500 $ 134,629 $ 134,629 $ 8,090 $ 12, $ 5,500 $ 150,494 $ 150,494 $ 9,042 $ 15, $ 5,500 $ 167,284 $ 167,284 $ 10,049 $ 20, $ 5,500 $ 196,111 $ 196,111 $ 11,779 $ 26, $ 5,500 $ 184,742 $ 184,742 $ 11,779 $ 33, $ 5,500 $ 157,782 $ 161,384 $ 11,779 $ 42, $ 5,500 $ 119,904 $ 149,606 $ 11,779 $ 75, $ 5,500 $ 129,376 $ 137,827 $ 11,779 $ 60, $ 5,500 $ 123,814 $ 126,048 $ 11,779 $ 60, $ 5,500 $ 117,430 $ 117,430 $ 11,779 $ 64, $ 5,500 $ 112,693 $ 112,693 $ 11,779 $ 70, $ 5,500 $ 109,154 $ 109,154 $ 11,779 $ 76, $ 5,500 $ 64,114 $ 79,705 $ 11,779 $ 98, $ 5,500 $ 62,580 $ 64,751 $ 11,779 $ 91, $ 5,500 $ 64,283 $ 64,283 $ 11,779 $ 95,788 TOTAL $ 115,500 $ 64,283 $ 64,283 $ 211,291 IGAP DEATH BENEFIT $ - $95,788 IGAP INCOME BENEFIT DONOR PASSES ON $95,788 TOTAL IGAP *Market Return Net of all applicable fees. 49% Benefit ACGA Rates as of July

24 Traditional VS. IGAP Method ANNUAL CGA CGA MARKET IGAP DEATH ANNUAL IGAP IGAP YEAR AGE GIFT WITHDRAWLS VALUE PROCEEDS WITHDRAWLS BENEFIT $100,000 $ 5,500 $ 94,500 $ 94,500 $ 6,000 $ $ 5,500 $ 118,672 $ 118,672 $ 7,132 $ 2, Market value $ 5,500 $ 119,805 $ 119,805 $ 7,200 $ 3, never exceedes $ 5,500 $ 122,884 $ 122,884 $ 7,385 $ 5, $ 5,500 $ 110,511 $ 110,511 $ 7,385 $ 7,602 the pre $ 5,500 $ 127,470 $ 127,470 $ 7,660 $ 9,762 level $ 5,500 $ 134,629 $ 134,629 $ 8,090 $ 12, $ 5,500 $ 150,494 $ 150,494 $ 9,042 $ 15, $ 5,500 $ 167,284 $ 167,281 $ 10,049 $ 20, $ 5,500 $ 196,111 $ 196,111 $ 11,779 $ 26, $ 5,500 $ 184,742 $ 184,742 $ 11,779 $ 32, $ 5,500 $ 157,782 $ 161,384 $ 11,779 $ 42, $ 5,500 $ 119,904 $ 149,606 $ 11,779 $ 75, $ 5,500 $ 129,376 $ 137,827 $ 11,779 $ 60, $ 5,500 $ 123,814 $ 126,048 $ 11,779 $ 60, $ 5,500 $ 117,430 $ 117,430 $ 11,779 $ 64, $ 5,500 $ 112,693 $ 112,693 $ 11,779 $ 70, $ 5,500 $ 109,154 $ 109,154 $ 11,779 $ 76, $ 5,500 $ 64,114 $ 79,705 $ 11,779 $ 98, $ 5,500 $ 62,580 $ 64,751 $ 11,779 $ 91, $ 5,500 $ 64,283 $ 64,283 $ 11,779 $ 95,788 TOTAL $ 115,500 $ 64,283 $ 64,283 $ 211,291 IGAP DEATH BENEFIT $ - $95,788 IGAP INCOME BENEFIT DONOR PASSES ON *Market Return Net of all applicable fees. ACGA Rates as of July 2011 $95,788 IGAP 49% Benefit 24

25 Traditional VS. IGAP Method ANNUAL CGA CGA MARKET IGAP DEATH ANNUAL IGAP IGAP YEAR AGE GIFT WITHDRAWLS VALUE PROCEEDS WITHDRAWLS BENEFIT $100,000 $ 5,500 $ 94,500 $ 94,500 $ 6,000 $ $ 5,500 $ 118,672 $ 118,672 $ 7,132 $ 2, $ 5,500 $ 119,805 $ 119,805 $ 7,200 $ 3, NPO get $ the 5,500 $ 122,884 $ 122,884 $ 7,385 $ 5, higher of $ the 5,500 $ 110,511 $ 110,511 $ 7,385 $ 7, account value $ or 5,500 $ 127,470 $ 127,470 $ 7,660 $ 9, $ 5,500 $ 134,629 $ 134,629 $ 8,090 $ 12,352 the death benefit $ 5,500 $ 150,494 $ 150,494 $ 9,042 $ 15,894 less withdrawl at $ 5,500 $ 167,284 $ 167,281 $ 10,049 $ 20,440 donor passing $ 5,500 $ 196,111 $ 196,111 $ 11,779 $ 26, $ 5,500 $ 184,742 $ 184,742 $ 11,779 $ 32, $ 5,500 $ 157,782 $ 161,384 $ 11,779 $ 42, $ 5,500 $ 119,904 $ 149,606 $ 11,779 $ 75, $ 5,500 $ 129,376 $ 137,827 $ 11,779 $ 60, $ 5,500 $ 123,814 $ 126,048 $ 11,779 $ 60, $ 5,500 $ 117,430 $ 117,430 $ 11,779 $ 64, $ 5,500 $ 112,693 $ 112,693 $ 11,779 $ 70, $ 5,500 $ 109,154 $ 109,154 $ 11,779 $ 76, $ 5,500 $ 64,114 $ 79,705 $ 11,779 $ 98, $ 5,500 $ 62,580 $ 64,751 $ 11,779 $ 91, $ 5,500 $ 64,283 $ 64,283 $ 11,779 $ 95,788 TOTAL $ 115,500 $ 64,283 $ 64,283 $ 211,291 DONOR PASSES ON *Market Return Net of all applicable fees. IGAP DEATH BENEFIT $ - $95,788 ACGA Rates as of July 2011 $95,788 IGAP INCOME BENEFIT TOTAL IGAP 49% Benefit 25

26 Traditional VS. IGAP Method ANNUAL CGA CGA MARKET IGAP DEATH ANNUAL IGAP IGAP YEAR AGE GIFT WITHDRAWLS VALUE PROCEEDS WITHDRAWLS BENEFIT $100,000 $ 5,500 $ 94,500 $ 94,500 $ 6,000 $ $ 5,500 $ 118,672 $ 118,672 $ 7,132 $ 2, $ 5,500 $ 119,805 $ 119,805 $ 7,200 $ 3,832 IGAP INCOME $ 5,500 $ 122,884 $ 122,884 $ 7,385 $ 5, REMAINS $ THE 5,500 $ 110,511 $ 110,511 $ 7,385 $ 7, SAME UNTILL $ 5,500 $ 127,470 $ 127,470 $ 7,660 $ 9, DONOR PASSES $ 5,500 $ 134,629 $ 134,629 $ 8,090 $ 12, $ 5,500 $ 150,494 $ 150,494 $ 9,042 $ 15, $ 5,500 $ 167,284 $ 167,281 $ 10,049 $ 20, $ 5,500 $ 196,111 $ 196,111 $ 11,779 $ 26, $ 5,500 $ 184,742 $ 184,742 $ 11,779 $ 32, $ 5,500 $ 157,782 $ 161,384 $ 11,779 $ 42, $ 5,500 $ 119,904 $ 149,606 $ 11,779 $ 75, $ 5,500 $ 129,376 $ 137,827 $ 11,779 $ 60, $ 5,500 $ 123,814 $ 126,048 $ 11,779 $ 60, $ 5,500 $ 117,430 $ 117,430 $ 11,779 $ 64, $ 5,500 $ 112,693 $ 112,693 $ 11,779 $ 70, $ 5,500 $ 109,154 $ 109,154 $ 11,779 $ 76, $ 5,500 $ 64,114 $ 79,705 $ 11,779 $ 98, $ 5,500 $ 62,580 $ 64,751 $ 11,779 $ 91, $ 5,500 $ 64,283 $ 64,283 $ 11,779 $ 95,788 TOTAL $ 115,500 $ 64,283 $ 64,283 $ 211,291 DONOR PASSES ON *Market Return Net of all applicable fees. IGAP DEATH BENEFIT $ - $95,788 IGAP INCOME BENEFIT ACGA Rates as of July 2011 $95,788 IGAP 49% Benefit 26

27 Let s summarize what we ve seen! Insured Gift Annuity Program (IGAP) Transfers the Investment Risk Transfers the Longevity Risk Transfers the Interest Rate Risk Transfers the Administrative Burdens Transfers the Donor s Concerns 27

28 The Three Way Test Is IGAP good for the donor? Is IGAP good for our mission? Is IGAP good for our organization? 28

29 THANK YOU! IGAP Protecting Your Charitable Gift Annuity Program 29

30 IMPORTANT NOTICES AND DEFINITIONS 30

31 Variable annuities are complex investment products with unique benefits and advantages. There are costs and charges that are different or do not exist at all, within other investment products. We encourage you to compare the various advantages of variable annuities with other investment options especially your current investment choices. This process of comparison and analysis should aid your organization in determining whether the purchase of a variable annuity contract is consistent with your investment objectives, risk tolerance, and needs. A typical prospectus is provided that contains basic information you should understand about annuities before you invest. Please read this prospectus carefully. We encourage you to ask questions. *Not a deposit *Not FDIC insured *Not insured by any federal government agency *May lose value 31

32 Death Benefits (Passing It On) There are a variety of death benefits available dependent upon the annuity carrier contract. Please consultant with the prospectus provided for a detailed explanation of the costs associated with these features. Some types of benefit available are: Percent Roll-Up Death Benefit: Usually the greater of A return of total investment, adjusted for withdrawals, OR The contract value, OR The initial investment compounded annually by a stated percent Maximum Anniversary Value Death Benefit: Usually the greater of A return of the total investment, adjusted for withdrawals, OR The contract value, OR The highest value on any contract anniversary Combination Death Benefit Option: Usually the greater of The Percent Roll-Up Death Benefit, OR The Maximum Anniversary Value Death Benefit Earnings Enhanced Death Benefit: Usually an amount added to the value of any death benefit payable. This is typically a percentage of any investment gain subject to a cap. 32

33 Guaranteed Income Withdrawal Benefit Guaranteed Income Withdrawal Benefit (GIWB) are designed to help create a guaranteed income stream you make take that last as long as the donor/annuitant lives. The organization will receive an income stream as long as the donor/annuitant is alive even if the entire contract value has been reduced to zero. While each carrier s annuity may offer different features, the GIWB generally offers a guaranteed lifetime income based on the contract s highest anniversary account value (called the Benefit Base). This value is reset annually if applicable. The Benefit Base or anniversary value can be a higher value but the value used to determine you income stream cannot go lower. This optional benefit typically costs 1.00%. Please see the prospectus provided for details on this and other income options available. 33

34 Financial Strength Ratings A.M. Best: A++ and A+ (Superior) Assigned to companies which have, on balance, superior balance sheet strength, operating performance and business profile when compared to the standards established by the A.M. Best Company. These companies, in our opinion, have a very strong ability to meet their ongoing obligations to policyholders. A and A- (Excellent) Assigned to companies which have, on balance, excellent balance sheet strength, operating performance and business profile when compared to the standards established by the A.M. Best Company. These companies, in our opinion, have a strong ability to meet their ongoing obligations to policyholders. B++ and B+ (Very Good) Assigned to companies which have, on balance, very good balance sheet strength, operating performance and business profile when compared to the standards established by the A.M. Best Company. These companies, in our opinion, have a good ability to meet their ongoing obligations to policyholders. B and B- (Fair) Assigned to companies which have, on balance, fair balance sheet strength, operating performance and business profile when compared to the standards established by the A.M. Best Company. These companies, in our opinion, have an ability to meet their current obligations to policyholders, but their financial strength is vulnerable to adverse changes in underwriting and economic conditions. C++ and C+ (Marginal) Assigned to companies which have, on balance, marginal balance sheet strength, operating performance and business profile when compared to the standards established by the A.M. Best Company. These companies, in our opinion, have an ability to meet their current obligations to policyholders, but their financial strength is vulnerable to adverse changes in underwriting and economic conditions. C and C- (Weak) Assigned to companies which have, on balance, weak balance sheet strength, operating performance and business profile when compared to the standards established by the A.M. Best Company. These companies, in our opinion, have an ability to meet their current obligations to policyholders, but their financial strength is very vulnerable to adverse changes in underwriting and economic conditions. D (Poor) Assigned to companies which have, on balance, poor balance sheet strength, operating performance and business profile when compared to the standards established by the A.M. Best Company. These companies, in our opinion, may not have an ability to meet their current obligations to policyholders and their financial strength is extremely vulnerable to adverse changes in underwriting and economic conditions. Fitch: AAA (Exceptionally strong) Insurers assigned this highest rating are viewed as possessing exceptionally strong capacity to meet policyholder and contract obligations. For such companies, risk factors are minimal and the impact of any adverse business and economic factors is expected to be extremely small. AA (Very strong) Insurers are viewed as possessing very strong capacity to meet policyholder and contract obligations. Risk factors are modest, and the impact of any adverse business and economic factors is expected to be very small. A (Strong) Insurers are viewed as possessing strong capacity to meet policyholder and contract obligations. Risk factors are moderate, and the impact of any adverse business and economic factors is expected to be small. BBB (Good) Insurers are viewed as possessing good capacity to meet policyholder and contract obligations. Risk factors are somewhat high, and the impact of any adverse business and economic factors is expected to be material, yet manageable. BB (Moderately weak) Insurers are viewed as moderately weak with an uncertain capacity to meet policyholder and contract obligations. Though positive factors are present, overall risk factors are high, and the impact of any adverse business and economic factors is expected to be significant. B (Weak) Insurers are viewed as weak with a poor capacity to meet policyholder and contract obligations. Risk factors are very high, and the impact of any adverse business and economic factors is expected to be very significant. CCC, CC, C (Very weak) Insurers rated in any of these three categories are viewed as very weak with a very poor capacity to meet policyholder and contract obligations. Risk factors are extremely high, and the impact of any adverse business and economic factors is expected to be insurmountable. A 'CC' rating indicates that some form of insolvency or liquidity impairment appears probable. A 'C' rating signals that insolvency or a liquidity impairment appears imminent. DDD, DD, D (Distressed) These ratings are assigned to insurers that have either failed to make payments on their obligations in a timely manner, are deemed to be insolvent, or have been subjected to some form of regulatory intervention. Within the DDD-D range, those companies rated 'DDD' have the highest prospects for resumption of business operations or, if liquidated or wound down, of having a vast majority of their obligations to policyholders and contractholders ultimately paid off, though on a delayed basis (with recoveries expected in the range of %). Those rated 'DD' show a much lower likelihood of ultimately paying off material amounts of their obligations in a liquidation or wind down scenario (in a range of 50-90%). Those rated 'D' are ultimately expected to have very limited liquid assets available to fund obligations, and therefore any ultimate payoffs would be quite modest (at under 50%). Notes: "+" or "-" may be appended to a rating to indicate the relative position of a credit within the rating category. Such suffixes are not added to ratings in the "AAA" category or to ratings below the "CCC" category. 34

35 Financial Strength Ratings (continued Moody s: Aaa. Insurance companies rated Aaa offer exceptional financial security. While the financial strength of these companies is likely to change, such changes as can be visualized are most unlikely to impair their fundamentally strong position. Aa. Insurance companies rated Aa offer excellent financial security. Together with the Aaa group, they constitute what are generally known as highgrade companies. They are rated lower than Aaa companies because long-term risks appear somewhat larger. A. Insurance companies rated A offer good financial security. However, elements may be present which suggest a susceptibility to impairment sometime in the future. Baa. Insurance companies rated Baa offer adequate financial security. However, certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Ba. Insurance companies rated Ba offer questionable financial security. Often the ability of these companies to meet policyholder obligations may be very moderate and thereby not well safeguarded in the future. B. Insurance companies rated B offer poor financial security. Assurance of punctual payment of policyholder obligations over any long period of time is small. Caa. Insurance companies rated Caa offer very poor financial security. They may be in default on their policyholder obligations or there may be present elements of danger with respect to punctual payment of policyholder obligations and claims. Ca. Insurance companies rated Ca offer extremely poor financial security. Such companies are often in default on their policyholder obligations or have other marked shortcomings. C. Insurance companies rated C are the lowest-rated class of insurance company and can be regarded as having extremely poor prospects of ever offering financial security. Note: Moody s applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. S&P : AAA An insurer rated AAA has EXTREMELY STRONG financial security characteristics. AAA is the highest Insurer Financial Strength Rating assigned by Standard & Poor s. AA. An insurer rated AA has VERY STRONG financial security characteristics, differing only slightly from those rated higher. A. An insurer rated A has STRONG financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are insurers with higher ratings. BBB. An insurer rated BBB has GOOD financial security characteristics, but is more likely to be affected by adverse business conditions than are higher rated insurers. An insurer rated BB or lower is regarded as having vulnerable characteristics that may outweigh its strengths. BB indicates the least degree of vulnerability within the range; CC the highest. BB. An insurer rated BB has MARGINAL financial security characteristics. Positive attributes exist, but adverse business conditions could lead to insufficient ability to meet financial commitments. B. An insurer rated B has WEAK financial security characteristics. Adverse business conditions will likely impair its ability to meet financial commitments. CCC. An insurer rated CCC has VERY WEAK financial security characteristics, and is dependent on favorable business conditions to meet financial commitments. CC. An insurer rated CC has EXTREMELY WEAK financial security characteristics and is likely not to meet some of its financial commitments. R. An insurer rated R has experienced a REGULATORY ACTION regarding solvency. The rating does not apply to insurers subject only to nonfinancial actions such as market conduct violations. NR. An insurer designated NR is NOT RATED, which implies no opinion about the insurer s financial security. Plus (+) or minus (-) signs following ratings from AA to CCC show relative standing within the major rating categories. 35

36 Counting The Costs Fees and charges are applicable to variable annuities. The specific fees and charges applicable to the case study are provided in the prospectus. Please consult the prospectus for details. Those pees can charges include: Surrender Charges: Assessed on withdrawals that exceed the free withdrawal amount within a stated period of time. Usually a percentage of the withdrawal. Mortality & Expense Risk Charge: Annual fee assessed on a daily basis to cover the insurance company s risk that actual mortality rates will be lower than expected. Administrative Fees: These charges cover record keeping, statements and customer service, and are only assessed on variable annuity products. Contract Maintenance Fees: Fixed annual fees that are charged on contracts with values below a predetermined amount. These fees only apply to variable annuity products. Underlying Sub-Account Expenses: Include management fees paid to the investment adviser. These are similar to the management fees on a mutual fund and will reduce the return on your investment. Sales Compensation: The insurance company pays Morgan Stanley Smith Barney a commission when an investor purchases a variable annuity through a Morgan Stanley Smith Barney Financial Advisor. Morgan Stanley Smith Barney pays a portion of the commission to the age and the amount of money invested. 36

37 Case Study Disclaimer The case study illustrations are hypothetical and are not intended to serve as a prediction or projection of investment results of any specific investments. Values that are set forth in the illustration are not guaranteed. The information provided in the case study was developed with SunAmerica for illustrative purposes only. The statistics were obtained from sources we believe to be reliable, but we cannot be guarantee its accuracy or completeness. Past performance is no guarantee of future results. A complete copy of the illustration and prospectus is provided. The full case study illustration must be preceded or accompanied by a prospectus. You should consider the investment objective, risks, charges and expenses of the variable annuity product and its underlying funds carefully before investing. Each of the underlying fund options within the annuity has a prospectus that also contains important information you need to consider before investing. The fund prospectus is provided. Read all prospectuses carefully before making a purchase. Not a deposit Not FDIC or NCUSIF insured Not guaranteed by the institution Not insured by any federal government agency May lose value 37

38 Important Disclosures Annuities are long-term investments designed for retirement purposes and are subject to investment risk, including the possible loss of principal. Withdrawals taken prior to age 59½ can result in a 10% federal income tax penalty. Additionally, changing annuities may result in surrender charges and other fees. New surrender charges may be imposed with a new contract or may increase the period of time for which surrender charges apply. The new contract may be subject to additional insurance and investment-related fees as well as increased risks. All guarantees are based on the claims-paying ability of the issuing insurance company. Variable annuities are sold by prospectus only. The prospectus contains the investment objectives, risks, fees, charges and expenses, and other information regarding the variable annuity contract and the underlying investments, which should be considered carefully before investing. Prospectuses for both the variable annuity contract and the underlying investments are available from your Financial Advisor or if you do not have a Financial Advisor, please visit smithbarney.com to locate one near you. Insurance Products offered through SBHU Life Agency, Inc. Please read the prospectus carefully before you invest. Morgan Stanley Smith Barney LLC and its affiliates do not provide tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the promotion or marketing of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor Morgan Stanley Smith Barney LLC. Member SIPC. 38