THE Fixed Index ANNUITY. Bryan anderson. Guiding the retirement journey

Transcription

1 THE Fixed Index ANNUITY Bryan anderson Guiding the retirement journey

2 Fixed Index Annuities: Potential for Gains No Risk of Loss Optional Riders: Lifetime Income, Long Term Care, and More 1

3 Executive Summary of AST s Annuity Guide Our Approach: We build retirement plans that work, guaranteed, even when the markets tank. Insure Your Retirement with a Safe, Guaranteed Floor This is just a brief summary on the Annuity Guide. If you d like to read the full report, CLICK HERE. Traditional Planning Alone Doesn t Work Follow conventional wisdom and you re left holding the bag, with market volatility, longevity, and sequence of returns, withdrawal rate, and many other risks. Why carry these risks when there are better strategies? The New Rules for Retirement The 3 pillars of all investment analysis are Safety, Growth, and Income Safety First! In retirement, Rule #1, don t lose money. Rule #2? See Rule #1 Experts agree, guaranteed annuities are SAFE. You won t lose, and you will mitigate risks. Allocating a portion of your assets to annuities for Safe Growth and/or Safe Growth With Income will SAFELY increase overall portfolio performance. Step 1: Define Your Objectives to Choose What s Right for You: Identify your essential, and discretionary, expenses Cover those baseline essential needs with guaranteed income, first. Then optimize remainder assets for more income or growth, to cover the discretionary. Step 2: Use the Best Tool for the Job We use different annuities for Safe Growth, Safe Income, or Safe Growth with Income Index Annuities for Safe Growth Index Annuities with riders or Immediate Annuities for Safe, Lifetime Income Secondary Market Annuities defined period Safe Growth, Safe Income, and many other diverse planning needs Step 3: Work With the Best- The Annuity Straight Talk Approach Our plans produce income, or growth, or some of both, at the lowest possible cost, to preserve as much flexibility and liquidity as possible. Often, clients don t need more income, but they do need to increase overall portfolio safety using guarantees. We help you identify what you need, and leave out the bells and whistles if they re not needed, and then pick the best contract for the job. 2

4 What To Expect When Working With Us In retirement, what you have is not nearly as important as what you have to spend. Therefore, locking in guarantees that preserve your money and that may also produce guaranteed income, is the cornerstone of responsible retirement planning. Now, this guaranteed income does not need to be locked in today. Honestly, a guaranteed outcome is what we seek- that may mean implementing guarantees today to mitigate risks, and that give income or other options years into the future. For example, very often, our clients have seen income annuities but come to realize they need safety, and don t need to lock in income now. Annuities focused on growth, with low costs, do this perfectly. Appropriate Use of Guaranteed Annuities: When seeking guarantees, investors are barraged with a wide range of products that may or may not be appropriate to their needs. Often, confusion reigns as a plethora of marketing messages compete for attention. Contractual terms, conditions and fine print quickly cloud the goal. Many who would greatly benefit from a sound financial plan never take action. They exit the market more confused, and less protected, than when they start. But no longer. We cut through that confusion in The Annuity Guide. We ve given you all the reasons why a floor level of income or guarantee is essential to planning wisely. We ve shown you the academic research, We talked about the risks in retirement guarantees can alleviate We hit the pros and cons of annuities We detailed the frequently asked questions about annuities. And we reviewed the most common annuity-focused strategies we see If you ve made it this far, chances are good that we d work well together, and at this point, people who like our approach give us a call to get started. Click Here To Take The First Step- Schedule An Appointment. So if you re wondering what we ll go through when we do speak, here s an overview of what to expect when working with Annuity Straight Talk: 3

5 How To Choose What s Right For You: The AST Process Initial Consultation Goals: o What are your goals and objectives? o What s your {So I Can Finally } dream? Target: o How much do you need, for who, and when? o State, age, deferral years, retirement timeline, etc Safety, Growth and Income goals o If Income, is this Single or Joint life, period certain or lifetime? o If Safe Growth, timeline, desired outcome, liquidity needs? o Inheritance, capital needs, other considerations? Income: Wants vs needs o Needs (Must Have Income For Guaranteed Expenses) Housing/utilities/food/ transportation/health care o Wants (Discretionary Expenses) Luxury lifestyle/ inheritance/ travel/ entertainment/ o Options/ Contingencies A plan for emergency income at any time Liquidity/ Flexibility Resources: What do we have to work with o Qualified accounts, pensions, Social Security, life insurance, cash, and equity Subsequent Meetings: Strategies: Pros and Cons of various approaches o Look at strategies in general that accomplish the objectives. o Compare strategies as apples to apples, to see how each will accomplish your needs, or fall short o Discuss merits and issues with each strategy, Make sure we eliminate unsuitable options Make sure we don t overlook good options o Agree upon a specific strategy Tactics: Get Specific o Identify the right tools for the job o Specific annuity contract selection Execution Take Action: Get It Done o Execute the plan we agree upon o Annuity Applications/ selections, purchase paperwork, closing, funding Ongoing Review: Upon transaction completion and regularly thereafter o Every plan needs to be reviewed at least annually o Ongoing client communication, review, and adjustment or reinvestment as necessary How else can we help? o Additional needs, new needs, o Friends, family, or others who might benefit from our approach? 4

6 Executive Summary of Fixed Indexed Annuities Upside Potential, & No Downside Risk What Are Fixed Indexed Annuities (FIA) Fixed index annuities are conservatively invested, just like fixed annuities The fixed account interest earnings are used to buy an option that participates in the stock market. Market gains, subject to certain limits, are captured via the option strategy and credited to the account. Market losses have no effect on the account. When markets drop, only the option price is lost. Index Annuities deliver market upside potential, with no risk to principal. Income Riders Turn FIAs into Hybrid Annuities Income Riders create a separate income account that grows or Rolls Up during deferral years, and is used to calculate lifetime income payable for single or joint life. Typically, the Roll-Up rate of this income base is 6-8% and is frequently misrepresented as a guaranteed growth rate. Remember- it s not you actual account value that is growing however! Often income riders include additional death benefits, home health care benefits, minimum guaranteed surrender value, and other benefits Benefits And Uses Safe Growth: For safe appreciation, capital preservation, and future options, use an index annuity designed for maximum growth, with no income rider Safe Growth & Income: FIA s designed for growth & income have nominal rider fees and their growth formulas, caps, participations will be different than pure growth contracts. The Purchase Process Purchase process requires consultation, strategy, product selection, & application. We ensure a complete understanding of your strategic objectives prior to selecting any specific products. Cash or IRA/ Qualified funds can be used 5

7 Equity Index Or Fixed Index Or Hybrid. Which Is It? Index Annuities, Fixed Index Annuities, and Equity Indexed Annuities, all mean the same thing. These are all the same insurance product, but with different labels. The correct name is a Fixed Index Annuity Fixed Index Annuities may form a part of your guaranteed foundation if you are seeking protected growth, and if you seek growth + income an index annuity with an income rider may be appropriate. In this section, we will explain how these annuity contracts work, how you select, and what to watch out for, and the riders you will find. Index Annuities vs. Hybrid Annuities A common addition to an Index Annuity is a lifetime income rider. When the benefits of an index annuity are combined with income riders, the resulting contract is often referred to as a Hybrid Annuity because it is a hybrid of the index annuity benefits we ll detail below, and lifetime income benefits often found in other types of contracts. We detail the extra components of the hybrid annuities after we cover the basics of index annuities. EQUITY INDEX ANNUITIES The term Equity Index Annuity is an older term not in use as much anymore. Equity infers a stock market or equities element to consumers. Equity is quickly associated with securities and the Securities Exchange Commission, who likes to regulate things like mutual funds and stocks and bonds. Indexed annuities are squarely insurance products however, and not governed by SEC, FINRA, or other securities regulating bodies. While there was a threat of SEC regulation in , the insurance industry successfully fought off the SEC and FINRA and that cancer is now in remission. The insurance industry is already heavily regulated, and frankly, the SEC and FINRA did such a great job regulating Enron, Bernie Madoff, Alan Stanford, and all kinds of other fully regulated crooks, that we in the insurance industry don t feel we need their kind of help one little bit. 6

8 What s Right for You? The typical buyer of an index annuity seeks the potential for growth without risk of loss, principal protection, and tax deferred compounding. Index Annuities are great for a safe money strategy, and are often used to make sure principal is safe, and to preserve assets and options for later. The typical hybrid annuity buyer is attracted to the potential for growth, but is also seeking to secure lifetime income from their principal at the time of their purchase. Other benefits vary by contract and include certain death benefits, home health care riders, rollup rates and bonuses. It s crucial to know that the annuity contract that is optimized for growth will not offer you the best income benefits and the contract geared to income, will not be the best growth option. There are over 350 different index annuity contracts on the market today and it s growing every day. Far too many agents have one preferred contract they work with for all scenarios. That is just not appropriate, and it s why we start by understanding your objectives before looking at a specific contract. Index annuities are perfect if you want safety and growth. Hybrid index annuities with income riders are great for growth + income. The specific annuity contract that s ideal for growth is not the best for Income First, learn how they work in general, then give us a call to select the contract right for you. 7

9 Sample Planning Cases Using Index Annuities Sometimes a real example is much more effective than facts and details. So before we jump to the details, here are a few example cases where we used an Index Annuity as part of a client s optimal plan. *** Client: Marcy Situation: Late 40 s, Needed an annuity to protect assets and grow, without risk of loss, did not need to lock in income now as she was working and had support. She needed a vehicle for safe appreciation. Concerns: Marcy was concerned about creditors, and protecting her assets from them. In her state, annuities are a protected class of asset. Assets: $150,000 Solution: With our help she quickly identified an index annuity with an excellent growth component and moderate surrender schedule. As she intended to hold for at least 10 years, the surrender was not really an issue. She invested in a great contract with an A rated carrier and safely protected her assets from creditors, and has potential for growth and no account fees. After years of accumulation, she will re-evaluate her income needs and consider a new income oriented annuity at that time. *** Client: Gary R Situation: Client had seen deceptive ads for 8% annuity but upon conversations, he did not need income. Had pensions and other income, but didn t want to take any risk with this capital. Concerns: TIAA Cref- custodian of client IRA- fought hard to prevent client withdrawal, and other agents would only talk about income, not focusing on clients need for safety and no need for income. Assets: $330,000 invested Solution: After discussions with client, it was clear a protected growth contract with no income rider was perfect. Placed client s allocation in a safe high quality index annuity to preserve and grow. *** Client: Bob and Lynn Situation: They have enough to retire, but are younger. The payout rate available to them to produce the needed income from a guaranteed income rider would have locked up significant amount of their assets. They want no risk to their money, but needed more flexibility. Concerns: Outliving assets and maintaining income. Solution: While they were shown income oriented contracts by other agents pushing for a large sale, we recommended a far smaller annuity allocation in a safe money, growth only index annuity with no income rider. With their safe money in the annuity, remainder assets can be geared to growth. This 5-10 year plan removes interest rate exposure. Use of free withdrawals from the index annuity for income as needed eliminates sequence of returns risk, and reduces overall portfolio risk. 8

10 How Do Index Annuities Work? Index annuities are nothing more than fixed annuities with a different method of crediting interest. With a fixed annuity, the contract owner receives a stated rate of interest each year. With an index annuity, the appreciation rate is calculated based on growth in an outside market index. If the index goes up, the contract makes money. But if the index goes down, the principal is protected and the contract does not lose value. Index annuities give consumers partial participation in the gains of the equity markets in exchange for principal guarantees. Index annuity owners will not lose money no matter how badly the market performs. It is a place for safe money. How Insurance Companies Make This Possible How can insurance companies make a guarantee to go up, but not down? It is not too good to be true, and it actually makes good sense once you see how it works. Let s start with the structure of a traditional, plain old fixed annuity as that is easy to understand. When you purchase a fixed annuity, you give the insurance company your premium and they essentially invest it in bonds and conservative vehicles like mortgages on commercial real estate. This is known as the insurance company s General Account. Whatever return the general account generates, less company operating expenses, equals the interest credit rate available for the annuity contract. The insurance company has all this calculated ahead of time and makes the fixed interest rate offer accordingly. As an example, let s assume an insurance company can make 6% return on investment and that annual operating expenses are 2%. In this case, a fixed annuity will be credited with 4% interest. You d buy a fixed annuity with a 4% guaranteed rate of return for a period of time (typically 3 to 10 years) and that s exactly what you would receive. Enter The Fixed Index Annuity In a fixed index annuity, the insurance company takes your premium and invests the principal in the same type of bonds and mortgages as are in the safe and steady general account. But with an indexed annuity, you have two basic options with the interest income. You can elect to take the base interest rate (which is roughly equivalent to the general account and what a fixed annuity would pay) or you can opt for the possibility of more growth. 9

11 If you opt for more growth, the company uses the interest earned from the conservative portfolio to purchase an option position in a market index. An option is simply the right- but not the obligation- to purchase securities at a future date for a contractually stated price. If the market goes up, the company will exercise the option and realize a gain. They credit a portion of the gain on that option contract to your annuity contract. If the market moves sideways or down, the option expires worthless and no interest or gain- is available for crediting. The cost of the option position typically uses up your interest earnings for the year from the conservative underlying investments. So while the principal is safe and securely invested still, its earnings were used up by the option and thus, you have a flat year with no interest credited. Potential for Gain with No Risk of Loss Index annuities truly offer you the potential for gains based on market appreciation, without the risk of loss to your principal. Your principal is not at risk, rather, it s only the earnings from your principal are invested in potentially higher yield options. Thus, an indexed annuity is a safe asset with upside potential. This explanation also gives you a good idea why these are called Fixed Index Annuities. Income from the FIXED account growth is used to buy options in a market INDEX for potential gain. If the market rises, you may profit. If the market falls, the company has wagered only your income from the FIXED account, so your principal at all times remains safe. 10

12 Participation: A Common Complaint: Most people will notice that index annuity contracts don t offer 100% of your principal amount in a market participation, for crediting purposes, and feel that the insurance company is taking too much of the deal. That sentiment is inaccurate but needs to be explored nonetheless. Here is the basic concept- when you invest $100,000 in an indexed annuity, the insurance company purchases $100,000 worth of corporate bonds and other safe investments like commercial mortgages. These bonds earn, let s say, 5%, or $5000, per year. Now for a fixed indexed annuity, the company is offering you a portion of the market gain in addition to its guarantee of your principal. So the insurance company can take the $5000 earned by your principal, and purchase an option in the S&P, NASDAQ, DOW, or other index. Unfortunately, $5000 worth of option does not buy you $100,000 worth of participation. A 1 year future option for $100,000 participation in the particular index you are betting on, at some forecasted reasonable gain, might cost $10,000 (this is hypothetical and for example purposes) Thus, the fixed interest credit available, ($5,000, earned by the invested underlying portfolio) is simply not enough to cover the cost of the market option for the full amount of the principal. The insurance company therefore offers you a Participation Rate. Lets look at an example. 11

13 Example of Participation Rate: In our hypothetical example, let s say the participation rate is 50%. The insurance company thus must purchase an option representing participation in the market for only a portion of the principal balance. In our example, let s say the $5000 earned by the underlying safely invested portfolio is enough to purchase $50,000 worth of market participation, via option. Now, the market index goes up 20% in the year. When this $50,000 option goes up 20% in value, what s it worth? $50,000* 20%=$10,000 gain. But when measured against your original principal balance, it s $100,000 +$10,000 = 10% Gain. Said differently, you have a 50% participation in the market. Make sense? So you can see, there is no way a 20% rise in the market should translate into a 20% gain in your indexed annuity. It s not that the insurance company is taking too much- there was never any more gain available for them to take at all! The $100,000 account thus can earn a gross 10% ($10,000). And it s true, there are inevitable company operating expenses as well, which might eat up a few % of our index gains, leaving your account value with $105,000 to $107,000 or so, depending on the company. This is 5% to 7% gain. All told, however, for a product with principal guarantees and superior safety, and no risk of principal loss, a net 5% to 7% is a pretty decent rate of return. 12

14 Pricing and Crediting Controls on Index Annuities: There are three different pricing controls an insurance company can place on a contract that are specifically meant to apply an interest credit that s in line with the net gain from the option. Depending on the company or product you are considering, you may see one or more of these terms. The three pricing controls are the participation rate, cap rate and spread. Participation Rate: This specifies the percentage of the index growth available for credit to the account. Example- a 10% gain in the S&P Index in a contract with a 50% participation rate means you would be credited with a 5% gain to your account value. Cap Rate: Another option is to have a stated maximum level of interest, or a cap, available for account crediting. Example: A 5% cap rate means if the index goes up 10% and you have a 5% cap, you will be credited the 5%. Spread: This is a fee imposed on the index credit that represents overall operating expenses for the insurance company. Example: In a year with the index gained 10% and you have 50% participation and a 2% spread, you would have 50% of the gain- 5%- and that 5% credited gain would be reduced by a 2% spread charge. You would net 3%. In most cases, in years where there is no index gain, no spread is assessed, so you can t go backwards. Pricing Controls Summary: Every annuity will apply one or more of these pricing controls. They have only so much income from the general account to work with as an option investment, so it s only logical that they would limit the amount of gain. Remember, your money is NOT invested directly in the markets, and NOT subject to risk of loss. So don t think that the insurance company is taking anything away from you with their caps, participations, and spreads. The company needs these charges to keep the credited interest in line with actual income and options revenues, and needs to be flexible to take into account changes in interest rates and market volatility, which affects options pricing. Finally, remember, you are buying appreciation potential, AND downside protection. Downside protection necessarily comes at some cost. 13

15 Index Annuity: Crediting Methods Total interest credit is subject to any one or more of the pricing controls previously mentioned. But how does the company determine the gain in the underlying index? Every index annuity comes with one or more crediting methods. There are the various ways- and they vary from company to company- that the gain in the underlying index is credited to your account. I ll focus on the most common methods. Annual Point to Point The beginning and ending index value are used to calculate the total gain or loss. For example, if the S&P 500 starts the year at 1000 and ends at 1100, the interest credit would be 10%, subject to the participation rate, cap rate or spread. If the annual return is 0% or less, no interest will be credited. So, while the option contract that gives you participation in the market expired out of the money the underlying principal value, guaranteed by contract, cannot lose value. Monthly Point to Point Same as above, but the period is a month rather than a year, and also subject to the participation rate, cap rate or spread. Monthly Average Each monthly anniversary, the level of the index is recorded. Those levels are added up at year s end and the total is divided by twelve and compared to the index level at the beginning of the year. The difference represents the gain or loss for the year, subject to the participation rate, cap rate or spread. If the annual return is 0% or less, no interest will be credited. Again, while the option contract that gives you participation in the market expired out of the money the underlying principal value, guaranteed by contract, cannot lose value. Monthly Sum The gain or loss in the index every month is recorded. Each value is totaled to calculate the annual gain or loss, subject to the participation rate, cap rate or spread. If the annual return is 0% or less, no interest will be credited. Again, while the option contract that gives you participation in the market expired out of the money the underlying principal value, guaranteed by contract, cannot lose value. What Is The Best Crediting Method? Extensive studies attempt to determine which crediting method is most profitable. No single method has shown total superiority as each works well in different market conditions. Most Index Annuity contracts offer multiple crediting methods and ways to change allocation for portions of the account between different methods. Choice of crediting method will depend on your view of where the market is going. But since no one really knows for sure, the prudent strategy is to divide your premium investment between the various crediting methods available in your contract. 14

16 Hypothetical Illustration Table: Let s look at a table of a basic index annuity. The starting investment of $100,000 has a 0% floor rate, meaning there is no minimum guaranteed growth. Some offer a minimum, others do not, so be sure to ask us for details of the specific contract you are considering. We used the actual returns for the S&P 500 Index for the years 2001 thru This was a volatile Lost Decade for stocks, but it illustrates the value proposition of an index annuity extremely well. There are columns for the year, the Index performance, and the Annuity performance. For the moment, we ll assume no fees for your investment in either the index, or the annuity. Other assumptions are a 5% annual cap. Year S&P 500 Hypothetical Market Annuity Interest Credit Annuity Account Value Performance 5% Annual Cap 0% Min. $ 100,000 $ 100, % $ 90,890 0% $ 100, % $ 80,001 0% $ 100, % $ 62,185 0% $ 100, % $ 80,045 5% $ 105, % $ 88,705 5% $ 110, % $ 92, % $ 115, % $ 107,585 5% $ 121, % $ 113,460 5% $ 127, % $ 71,230 0% $ 127, % $ 81,822 5% $ 133,742 Index Annuity Summary: Referring to the table above, you can see that if you were invested in the S&P 500 Market Index, you would have swung down to $62,185, up to $113,460, then back down to end a wild ride at $81,822. However in an index annuity you are protected from the down market, and you participate in the upswing. Your ending account value is a respectable $133,742. The Index Annuity delivered the promised protection from loss, and the participation in gains. Now, what if you want to turn that protected principal into a lifetime income stream? Fixed Index Annuities with lifetime income riders are the most common contracts known as hybrid annuities. Read on 15

17 Adding Income Riders: Hybrid Annuities The Hybrid Annuity is a catchall marketing term for an annuity contract with a combination of benefits. A hybrid annuity has contractual appreciation elements, lifetime income benefits, death benefits and long term care benefits, all rolled into one. It is a collection of benefits rolled in to one contract that can be a very powerful retirement tool. But like a computer that can do 250 highly complicated processes at once, it may be overkill if you only need one thing done very well. Remember our focus on Growth, or Income, or a Bit of Both? A hybrid annuity gives you a bit of both, but it won t be the BEST at either income, or growth. That said, it does not have the restrictions that limit your options in pure income or pure growth contracts. So be sure to know your goals going in- if you are looking for safe appreciation only, without the lifetime income, it may be more lucrative to buy an index annuity with higher caps and participation that does not offer a lifetime income rider. The purpose of this section is to explain the moving parts of these contracts in detail so that you can truly know if it s appropriate for your needs. What Annuities Underpin a Hybrid Annuity Contract? Hybrid annuities have appreciation, account value, and lifetime income benefits. These benefits are usually attached to underlying contracts as riders. The most common annuity contracts that are used in combination with these riders to create a hybrid annuity are index annuities and variable annuities. Variable annuities generally incur high fees and are sold through securities firms. They can go up in value, and they can go down in value. We at Annuity Straight Talk do not sell securities or variable annuities, and frankly, we don t see value in most variable contracts. For our purposes throughout this report, then, when we refer to hybrid annuities we are discussing index annuities with riders. This is the most common type product that is marketed as Hybrid Annuities today. 16

18 Product Overview: The Complete Picture Let s go top to bottom on an index annuity with lifetime income rider- your typical hybrid annuity. This description will identify the terms and benefits that will be expanded on later in this report. What Is A Hybrid Annuity? A hybrid annuity offers the potential for market based appreciation, protection from market volatility, and the benefits of lifetime income, all in one product. Hybrids also offer liquidity for emergencies, and accelerated payouts for home health care issues. The full name for a hybrid annuity is an Index Annuity with Guaranteed Lifetime Income Rider Safe Growth: Your money is invested conservatively, and earnings are re-invested by the issuing insurance company in options that credit you a portion of the gains in a market index, such as the S+P 500 or the Dow Jones. Gains from these options can increase your account value, but losses in the market do NOT affect your account. You have no volatility and no risk of loss to your money in an index annuity. Lifetime Income: Hybrid annuities also offer lifetime payout options, without annuitizing your assets and forfeiting your money. To calculate the lifetime income amount, the insurance company grows an income account every year that you leave your money invested. The longer you leave your money invested, the larger this income account grows. When you decide to start taking income, the company uses a payout rate to calculate your lifetime income. How Income Is Calculated: An Example Scenario For example, if you started with $100,000, and your income account rolled up at 7% per year for 10 years, your income base would have grown from 100,000 to roughly 200,000 in that time. The payout rate depends on your age when you start income, but let s assume it s a 6% payout. Rollup Rates and Payout Rates vary with each carrier. When you decide to start the lifetime income, you receive 6% of the 200,000, or $12,000 per year, for life. Of course, this income can be a joint payout too for you and a spouse. Even if your actual account value drops to $0, the lifetime income continues. 17

19 Other Benefits: One of the many other benefits is that if you die after only a few years of income, your heirs will get whatever is in your account value. This is a huge advantage over other kinds of annuities. A few other perks of these contracts include: Provisions to increase your income if you have a Long Term Care or disability issue, Enhanced death benefits for your heirs, Free withdrawals of a portion of your money each year for liquidity needs. Some contracts also offer a signup Bonus credit to your Income Account when you open a new account. A Word About Fees One of the best aspects of hybrid index annuity contracts is that they come with very low fees. The lifetime income rider is typically just 1% of the account per year. And while there are no other fees, you may be subject to surrender schedules just as you would have with most annuities and CD s. Overall, the low fees are a major advantage over expensive Variable Annuities. Summary: In sum, Hybrid Annuities offer potential appreciation, no risk of loss, lifetime income, and come with liquidity options and long term care benefits. Hybrid annuities are a great option for investors seeking safety, security, income, and flexibility in retirement, all in one contract. 18

20 Sample Planning Cases Using Hybrid Annuities Here are a few example cases where we used a hybrid annuity as part of a client s optimal plan. Because of the diverse nature of the benefits, you can achieve different objectives with this sort of annuity. *** Client: Larry S. Situation: Mid 60 s seeking joint life, lifetime income with a home health care rider as wife could not get Long Term Care coverage. Concerns: Larry had a clear idea of the Hybrid Annuity benefits he wanted, and had seen many options from other agents. On his initial call to us, it became clear he d been shown low credit quality carriers. We offered a more reasoned analysis and a higher credit contract that accomplished his goals. Assets: $100,000 investment Solution: We located an excellent Fixed Index Annuity with Lifetime Income rider and LT Care rider available in his state. Complicated rollover of multiple accounts, but we got it done. *** Client: Janet K. Situation: Mid 60 s, Single woman, seeking lifetime income. She had no idea how to go about planning for retirement. Concerns: Converting assets to income. Social security would play a big part but there was no clear answer telling her when the right time to take it would be. Janet wanted nothing to do with the market and simply wanted to protect what she had so she could approach the last few working years she has with some certainty. Assets: $100K IRA and $50K cash Solution: Rolled IRA into and index annuity that would protect her assets and allow for lifetime income. She has since added another $20K to her cash reserves and has decided to look for an additional annuity to produce a cash flow and return. As a result of this planning she is actually going to retire two years earlier than expected. 19

21 Deconstructing the Hybrid Annuity Now that you ve seen the product overview and a few planning cases, let s take a hybrid annuity apart piece by piece to understand how they all work. Those pieces are: Index Annuity Basic Function: o Upside Potential, Downside Protection Caps, Spreads, and Participation Rates: o How Much Interest You Are Credited With Crediting Methods: o How To Calculate Index Gains Income Riders: o Lifetime Income Attached To The Index Annuity Account Value Vs Income Benefit Value: o How Lifetime Income Is Calculated Rollup Rate, Bonus Rate And Payout Rate: o How Much Income You Get Liquidity Options, Free Withdrawals: o Flexibility Options Tying It All Together o Illustration Of Benefits Additional Benefits: o Such As Home Health Care, Death Benefit, Minimum Guarantee, Etc Index Annuity Basic Function: We covered the basics of the index annuity, including caps, participations, spread, and crediting methods, in the index annuity section. Income Riders: Understanding the Income Account The Lifetime Income Rider is an optional attachment to many contracts. This is the point where an index annuity becomes a hybrid annuity. When lifetime income riders are attached to the underlying investment, the annuity takes on new benefits, and a little more complexity. With an income rider, a calculation starts at the beginning of a contract, and accumulates for each year the annuity is invested and accruing. This Income Account Value and an associated Payout Rate is what the insurance company uses to calculate your lifetime income when you turn on the income option. The income account may be phrased as an income account, benefits base, or other terms. Acronyms are usually IAV and BB. We ll use Income Account through this report. 20

22 Account Value vs. Income Account Value A key element to clarify in our discussion of hybrid annuities is the difference between your actual account value, as opposed to your income account value. These are two very different things that are frequently confused by investors and advisors alike. If anyone is telling you that a hybrid annuity they are selling is guaranteed to go up by 7% per year they are flat out lying to you. Let this tripwire be your gauge of the integrity of any sales person you encounter- if they mess this one up, what else do they not understand? If you want, go back up to the product overview page where I gave a marketing focused description of a Hybrid Annuity. Reading carefully, it may seem like the annuity account grows at 7% per year, but that is not what it actually says. It s the Income Account that Rolls Up at 7% per year. The account value is YOUR money- real dollars that may appreciate. That s the core of the annuity as a Safe Growth product. An Income Account Value is NOT real dollars. It s just a number that the insurance company uses to calculate future payout rates from. It s the bridge between the investment, and the income insurance. Income Rider Fees The income Rider on a typical Index Annuity incurs an annual fee of ranging among carriers between.75% and 1% of the account value per year. Compare this to the fees in Variable Annuities, averaging 3% to 5%, and this lifetime income option is a good value. 21

23 Rollup Rate: How an Income Account Value Works Income accounts generally start with the same value as your premium investment. If you invest $100,000 at the start, your Income Account will also start with 100,000. Notice, there is no $ in front of this number. Companies may also use a Bonus that will add to your Income Account at the contract start. More on the bonus in just a moment. With a $100,000 investment, just the Income Account calculation rolling up at 8% per year would look like this: Income Account Value Year Rollup: 8% 100, , , , , , , , , , ,892 22

24 Bonus Rate Some companies additionally offer a Bonus on new accounts. It varies from company to company, but usually, the bonus is credited to your Income Account Value. For example, a $100,000 investment in a contract with a 10% bonus would have an Income account value of 110,000 on day one. This 110,000 would grow by the rollup rate each year. Using the table above with a 10% bonus, it would look like this: Income Account With 10% Bonus Year Rollup: 8% 110, , , , , , , , , , ,482 23

25 Payout Rate: The payout rate is an aged based percentage of the Income Account Value that determines your lifetime income amount. In most contracts, once you start taking income, the rollup of the Income Account stops. Some companies allow you to start and stop income a few times, and reinstitute the rollup when you are not taking income, but this is not available in all contracts. In the chart below, I show the rollup rate from above, an aged based Payout Rate that gets better the older you get, and the corresponding annual income amount. You could commence a lifetime income of the amount in the right hand column in any year, but once you start, the rollup stops. Your payout rate will vary depending on the carrier and your current age. Below is just for illustration purposes. Income Account With 10% Bonus Payout Rate Annual Income Year Rollup: 8% 110, ,800 4% $ 4, ,304 4% $ 5, ,568 4% $ 5, ,654 4% $ 5, , % $ 7, , % $ 7, , % $ 8, , % $ 9, , % $ 9, ,482 5% $ 11,874 24

26 Hybrid Annuities: Tying It All Together Lets put all these charts together to look at a typical hybrid annuity. Here we have a chart showing the Account Value, the Income Account Value, the Payout Rate, the Lifetime Income, and additional columns for an Enhanced Death Benefit and a Long Term Care Benefit. The LTC benefit and the Death Benefit are explained in the next section. Year S&P 500 Interest Credit Account Value Death Benefit Income Acct. W/ 10% Bonus Payout Rate Lifetime Annual Income LTC Benefit 5% Annual Cap 0% Min. 4% Rollup: 8% 2X $ 100,000 $ 100, , % 0% $ 100,000 $ 104, ,800 4% $ 4,752 $ 9, % 0% $ 100,000 $ 108, ,304 4% $ 5,132 $ 10, % 0% $ 100,000 $ 112, ,568 4% $ 5,543 $ 11, % 5% $ 105,000 $ 116, ,654 4% $ 5,986 $ 11, % 5% $ 110,250 $ 121, , % $ 7,273 $ 14, % 4.79% $ 115,531 $ 126, , % $ 7,855 $ 15, % 5% $ 121,308 $ 131, , % $ 8,483 $ 16, % 5% $ 127,373 $ 136, , % $ 9,162 $ 18, % 0% $ 127,373 $ 142, , % $ 9,895 $ 19, % 5% $ 133,742 $ 148, ,482 5% $ 11,874 $ 23,748 You will receive ONE of the amounts in any given year in the colored columns. In any year, the Account Value (prior to surrender penalties) is in the BLUE Account Value o It is available to you if you surrender the contract. If you pass away, the enhanced GREEN Death Benefit will be received by your heirs, if it is greater than the Account Value In any year, you may commence the PINK Annual Lifetime Income. When income starts, the Income Account will stop rolling up and growing You will receive the YELLOW LTC Benefit in income, shown annually, if you are diagnosed with a qualifying Long Term Care issue. The Income Account Value, rolling up at 8% and with a 10% bonus, is not colored. This is not money you could receive, it is only used to calculate the Lifetime Income at the Payout Rate. In this hypothetical illustration, if you invested $100,000 in an index annuity with lifetime income rider in 2001, you would have avoided all the downs, captured some of the ups, and could elect in 2010 to take either $133,742 as a lump sum, or take a full $11,874 per year, for life! Not a bad deal considering the state of the marketplace! 25

27 More Contract Options and Benefits: Minimum Guaranteed Surrender Value: (MGSV) Most companies offer a minimum guaranteed value to your contract, which is often illustrated as a column that includes a surrender charge. So if you have a 10% surrender penalty in year one on a $100,000 investment, your minimum surrender value would be shown as $90,000. To save space, this was not shown in the chart earlier however it would be shown abbreviated as MGSV in a product illustration. Surrender Charges Every Insurance carrier incurs costs for selling products and servicing accounts. They can recoup these costs in two ways- one is through annual fees, the other is Surrender Schedules Typically with Index Annuities with lifetime income riders you are entering into a long term relationship with a company, and they have long surrender schedules. The Carriers do not want you to surrender the contract- rather, they want to keep the premium and pay it out over time thru the income rider. Therefore, it s common to see surrender schedules of 8 to 12 years, and that step down with each passing year. For example, a 12 year surrender schedule may start at 12% in year 1 and go down by 1% each passing year, so that in the 10 th contract year you would have a 2% surrender penalty, and by year 13, there would be no surrender charge. The surrender value of the account is your actual account value, less this surrender charge if any. When examining a hybrid annuity, be sure you re taking the long view with this money. Of course, if you must surrender it you can, but the surrender penalties are lengthy and can be costly. Free Withdrawal Options With nearly all annuities, you do have the option to withdraw a portion of your actual account value penalty free each year. The amount of free withdrawal varies between contracts, and even varies state by state among the same contract. Typically, a 10% free withdrawal is permitted each year without penalty. So on a $100,000 investment that experienced no account growth, you could withdraw $10,000 without penalty in year 2. However, on hybrid annuities that carry a lifetime income withdrawal benefit rider, if you take out 10% of your account value, the company will also lower your Income Account Value by a corresponding 10%. Enhanced Death Benefit Some carriers offer an enhanced death benefit, where if you die, your actual account value may have a payout to your heirs in excess of the actual account value. 26

28 While this is not the same as a guaranteed minimum surrender value, because you cannot get the money while alive, it is a nice security for your heirs if you pass away early. Typically, contracts that offer the enhanced death benefit offer a guaranteed growth rate of 4%, though it varies among carriers. That would apply a 4% per year growth to your account value and pay the greater of the enhanced death benefit, or your actual account value, upon death. Long Term Care Provisions Typically, hybrid annuities that have a suite of benefits as we have been describing in this report also offer an enhanced payout rate if you are diagnosed with a critical illness or long term care issue. Usually this requires some medical confirmation that some of your critical Activities of Daily Living, or ADL s are compromised. While the LTC rider is a nice added feature, and generally comes at no additional cost, it is not a true replacement for Long Term Care Insurance which generally has higher payments and lower standards. LTC care is truly insurance, though there are LTC annuities also. For our purposes in this report, as a rule of thumb most hybrid annuities offer an enhanced payout of 1.5x to 2x your lifetime income Be sure to call us for details about LTC care riders in your Hybrid Annuity. For some of our clients it was a major decision factor as they were otherwise ineligible for LTC coverage. Contract Options and Benefits Summary: There are many components to a hybrid annuity. It truly is a compilation of benefits- it s an investment, insurance, income, and safety, rolled into one. Choosing a hybrid annuity is actually quite easy. Give us a call- using your goals, State of residence, and age, we will screen all the available products in the marketplace and help you select the best. We ll even do this live on screen with you - you can see the database of all the options and see how we select the best for you to choose. Don t hop from free lunch to product pitch to advertisement, getting confused along the way. Let the experts help you the right way- transparently, openly, and with you understanding each step of the way. 27

29 Further Resources on Index Annuities The real benefit that makes index annuities competitive is the ability for the account value to flatline when the market experiences a downturn. In turbulent markets like we have had recently, having potential appreciation with downside protection is critical. The reduced volatility makes indexed annuities almost non-correlated to market risks. You get some of the ups, with none of the downs. In fact, there is a strong argument for index annuities being positioned as the perfect safe money investment vehicle during a highly volatile economic climate. Recently the Wharton School released a white paper that studied actual returns of index annuities since they hit the market in This report gives a fair comparison between index annuities and various market indexes. The results show that although the annuities were never meant to compete with actual market returns, they have performed favorably in most years. The report is excellent because it s useful to cast aside polarizing opinions and get down to the concrete facts. The Wharton report can be found by CLICKING HERE. Also, Sheryl Moore of AnnuitySpecs.com is a great factual resource for independent market analysis of index products from someone who does not sell or endorse any particular annuity contract or company. Hybrid Annuity Summary In a volatile market, a hybrid annuity offers protection from losses, participation in gains, and the security of lifetime income. It also offers enhanced Death and Long Term Care benefits, all while offering liquidity through free withdrawals. Hybrid annuities truly can offer growth, plus income, all without risk of loss. 28

30 Your Next Step Now that you understand index annuities, and the lifetime income riders that make them into hybrid annuities, and you understand our approach using guarantees as the floor of a responsible financial plan, you really have two choices. You can do nothing with this information, and let the future unfold. Who knows, you might get lucky. But the risks of losing your investments in the market, or being forced to sell assets in a bad market to fund your retirement, will remain squarely on your head. The smart choice is to use the information you now have to make a proactive decision to secure your financial future. Call us to discuss your situation. We will explore the options that are appropriate to your needs. We re not a one trick, one product shop. The right annuity makes sense for many people. But one specific product type or carrier definitely does NOT make sense for all investors. Let us help you to find what s right for you. Above all, we re not afraid to tell you when NOT to buy an annuity either. For some people with sufficient guaranteed income already in place, there is no need for more! The ball is in your court, and we look forward to hearing from you. Click Here To Take The First Step- Schedule An Appointment. Yours, Nathaniel M. Pulsifer & Bryan Anderson Annuity Straight Talk