Page2 Chapter 1 Overview Annuities over the last 10-15 years have been an option that many consumers have considered to help them save for the future and plan for retirement. Annuities have many features and benefits that can be complex. Some consumers have purchased annuities in the past and have been disappointed in the results. However, many have purchased them and have been very happy with the results. Financial Planners have varying positions on annuities, some dislike annuities, some like them, some don t understand them, and some do. Clearly annuities have much discussion in the financial industry, which leads to uncertainty, guessing and outright misinformation on how annuities work. CLA USA representatives specialize on understanding the annuities with the best benefits that include: The Best Annuities that provide the Highest Income in Retirement The Best Guaranteed Rates of Return for Retirement Income The Best Riders that can Double Retirement Income This guide will organize and tell the annuity story with clarity. Our goal at CLA USA is to help consumers understand that greater Income in retirement is more important that assets and certain annuities accomplish that better than others. We stand ready to assist you in maximizing your Income in Retirement. Go to www.safemoneycla.com and give us a call or go to the contact page of our website.
Page3 The Three primary types of annuities 1. Indexed 2. Fixed 3. Variable The three types of annuities have two things in common. A tax deferral feature and surrender charges. (1) Gains in the annuity account value are tax deferred, meaning you don t pay taxes on the gain until you take the gain. In contrast, gains with non- qualified CD s, stocks, and bonds are taxed in the year they are earned even if you don t take the gains. (2) Annuities are purchased for a specific time frame. If you take an excess withdrawal from the annuity before the time period disclosed it may be subject to a surrender charge Chapter 2 Indexed Annuities Indexed Annuities are a type of Fixed Annuity. They have growing popularity for consumers due to protection of principal, participation in stock market returns and locking in gains. They are deferred annuities, meaning they don t mature until 5 to 14 years later and require the annuitant to keep the money in the annuity for that time period. They also provide benefit riders that include income, death and multiplied income with impairments. Index annuities have advantages over Variable annuities due to less complexity and less internal cost to administer. The thing that makes indexed annuities unique is the crediting features offered to the purchaser of the annuity by using an index. The most popular index is the S&P 500. Other indexes will be noted on the following page. The following crediting strategies for the Accumulation account are the most common: 1) ONE-YEAR ANNUAL POINT-TO-POINT WITH A CAP-The one-year annual point-topoint index percentage change is determined by subtracting the prior year s index value from the current year s index value then dividing by the prior year s index value, limited to the declared annual percentage cap. If the index percentage change is negative, 0% will be used as the index percentage change. The resulting index percentage change is multiplied by the option s account value to determine the index interest credit.
Page4 Value Value Example: 1 One Year Annual Point to Point with a 7% Cap $150,000 $130,000 $110,000 $90,000 $70,000 $50,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 Annual Cap of 7%, Index based on S&P 500 and based on dates 1/2/2008 to 1/4/2016 Compare the growth from $ 100,000 in 2008 year to $143,122 in the 2016 year to the Variable annuity table on page 2. Annual point to point caps of 7% do exist in the time frame outlined and continue currently. Please refer to specific policy brochure to identify the actual cap percentage. 2) ONE-YEAR MONTHLY POINT-TO-POINT WITH A CAP- The monthly point-to-point index percentage change is determined by adding 12 months of monthly index percentage changes. Positive monthly percentage changes are limited to the declared monthly percentage cap; negative monthly percentage changes are not limited. If the sum of the monthly index percentage changes is negative, 0% will be used as the index percentage change. The resulting index percentage change is multiplied by the option s account value to determine the index interest credit. Example: 2 $1,150 $1,100 One Year Monthly Point to Point with a 2% Cap Index Value, 1115.42 $1,050 $1,000 $950 $900 Account value, 1,063.74
Page5 Monthly Cap of 2%, Index is based on the S&P 500 with starting value @ $1,000.00 and date range from 1/2/2014 to 1/2/2015. Please compare this increase to the Variable Annuity table on page 2. The Variable Annuity had a 0.0% growth in the account value. The Account value in above graph is locked in at $1,063.74, a 6.374% increase and cannot go down in the following years of the annuity. No riders or other charges applied in this example 3) ONE-YEAR MONTHLY AVERAGE WITH A CAP- The one-year monthly average index percentage change is determined by first calculating the average of 12 months of monthly index values. This average is used to calculate the index percentage change over a one-year period relative to the prior year s index value, limited to the declared annual percentage cap. If the index percentage change is negative, 0% will be used as the index percentage change. The resulting index percentage change is multiplied by the option s account value to determine the index interest credit. Example 3: One Year Monthly average with a 5.75% Annual Cap Month/Year Index Value Month/Year Index Value Jan-14 1000.00 Jul-14 1063.08 Feb-14 965.77 Aug-14 1045.47 Mar-14 1006.40 Sep-14 1085.71 Apr-14 1015.22 Oct-14 1068.03 May-14 1020.87 Nov-14 1093.37 Jun-14 1042.26 Dec-14 1119.14 Monthly average of the index is $1,043.78. This is a 4.378% increase, and did not exceed the annual cap rate. Increase is locked in and cannot go down in the following years of the annuity. No riders or other charges apply in this example. Chapter 3 : Other Crediting Strategies and Indexes The Annual and Monthly crediting strategies are the most popular strategies. However, there are other options available: a) Declared Rate b) Annual Fixed Rate c) 2 year annual point to point* d) 3 year annual point to point* e) 5 year annual point to point*
Page6 *The multi-year options typically use an index other than the S&P 500. While the S&P 500 is the most commonly employed Index, other Indexes are available. They include: 1) Equity Indexes such as Dow Jones Industrial Average 2) Real Estate Indexes such as the Dow Jones U.S. Real Estate Daily Risk Control 3) Gold Indexes 4) Dynamic Allocation Indexes such as Barclays US Dynamic Balance Cap rates with annual maximums are the most commonly used. Other options are available and they include: a) Participation rates- they use a percentage of the Index typically ranging from 35-70%. i. For example, the S&P 500 index increases 10% from one anniversary date to the next. The participation rate is 60%, an interest credit of 6% will be applied to the account value and it locked in for future years. ii. Participation rates can be higher on the first year of the annuity, but it is not the norm. For example; year 1 has a participation rate of 90%. The following years will be lower 35-60%. b) Spreads typically are in the 2-5% range annually. They credit interest on the index used, normally the S&P 500. The spread % is subtracted from the index earned. i. For example, the S&P 500 index increases 10% from one anniversary date to the next. The spread is 3% an interest credit of 7% will be applied to the account value and is locked in for future years. ii. Spreads are also offered in the 2, 3 or 5 year resets (locked in) time period. Spreads percentages will typically double or even triple. Other key points of crediting strategy options: 1) You may allocate multiple crediting strategy options at one time to the accumulation account. For example, 70% to the annual point to point, 15% to the monthly point to point and 15% to the fixed account. Most indexed annuities allow up to 4 options. 2) The crediting strategy options can be changed each year on the anniversary date of the annuity. 3) No annual fees are charged to the account balance for crediting strategy options.
Page7 Chapter 4 : Other Features of Indexed Annuities 1) Annual Withdrawals- Each year you can withdraw up to 10% from the accumulation account value with no surrender charges 2) Flexible Premium- normally the annuity is funded with a single amount, but this feature allows additional deposits. 3) Surrender Charges Indexed annuities typically have time commitments from 7 to 14 years. If you withdraw more than 10% of the account value per year surrender charges will apply to the amount over 10%. The surrender charges typically start at a percentage that matches up to the time commitment. For example: A 10 year annuity has a 10% surrender charge starting in year one of the annuity and counts down to by each year of the annuity to 1%. Please refer to the specific policy for the actual surrender charges. 4) Minimum Guaranteed Surrender Value - These annuities contain a protective floor. 87.5% of your premium plus compounding interest at a rate of between 1-3% annually. Popular Riders 1) Income Rider a separate account is set up within the Indexed annuity. a. The Income account has a Guaranteed Rate of Return for a specific time period. This is known as the Roll Up rate. Roll Up rates currently are between 5-7% per year for up to 10 years. Certain Income riders offer a 50% increase in the income account at year 5 and some offer a 100% increase at year 10. b. Provides an income stream that the annuitant cannot out live. It is called the (GMWB) Guaranteed Minimum Withdrawal Base. The older the annuitant the higher the Base amount. Once the Income is taken the withdrawal rate is locked in and will be paid as long as the annuitant lives. c. A charge for the income rider will apply annually to the cash account value. Remember that two accounts exist, an accumulation account and the income account. 2) Impairment Rider Provides a 100% increase of the Guaranteed Withdrawal amount if two of the six daily activities cannot be performed. 3) Death Benefit Ride A Guaranteed annual increase in the base of the Death Benefit. It typically matches the Roll Up rate percentage of the Income base (5-7%) per year for 10 years. Bonus Features Normally are from 5 to 10% of the original premium deposit amount. Typically apply to the accumulation account but can apply to the Income account.
Page8 Chapter 5 : Fixed Annuities Types of Fixed Annuities A. Immediate B. MYGA (Multi-Year Guarantee Annuity) Immediate Annuities are the first type of fixed annuities. The purpose of Immediate Annuities is to provide a future guaranteed payment. The guaranteed payments are funded from a single amount to the insurance carrier. Typically these funds come from Real Estate proceeds, lump sum distributions from retirement plans, IRA s or savings. Payments can be received monthly, quarterly, semi-annually or annually. This type of annuity is also known as a SPIA which is an abbreviation for Single Premium Immediate Annuity. Below are the typical annuity payment options you can receive: (1) Life Income You receive the income payments as long as you live, but with no payments after your death. Normally, this option offers a higher income payment. If you want someone else to receive payments after your death you would not choose this option. (2) Joint and Survivor Life Income- Income payments are guaranteed for as long as either you or the joint annuitant lives. Payments will stop at the death of both the annuitant and joint annuitant, whichever occurs later. This is a good option for spouses. (3) Joint and Contingent Life Income- Income payments continue for as long as either you, or your contingent annuitant, live. The joint income payments will be paid in full while you are alive. If you die before the contingent annuitant, payments will continue at the rate you requested and will be paid as long as the contingent annuitant lives. Payments will stop at the death of the annuitant and contingent annuitant. (4) Life Income with a Guaranteed Period- You will receive income payments as long as you live. If you should die during the guaranteed period (in years) you select, the beneficiary selected will receive the remaining payment in the guaranteed time period. (5) Joint and Survivor Life Income with a Guaranteed Period- Income is guaranteed for as long as the annuitant or joint annuitant live. A full amount will be paid as long as both annuitants are alive. At the death of either annuitant you can elect to have the payment reduced. If both annuitants die during the guaranteed period, your beneficiary will receive the payments until the period has expired. (6) Income for a Certain Period- Income payment over a time period in years that is chosen. If you die within the chosen time period, the beneficiary elected may receive a one-time payment or continue to receive those payments until the time period has expired.
Page9 The second type of Fixed Annuities is MYGA s which means Multi-Year Guarantee Annuity. It guarantees the annual rate of return for 3 to 10 years. MYGA returns in the last 10 years have averaged from 2 to 5 %. Current MYGA annual returns range from 1.5% to 3.0%. These Multi-year guaranteed returns are higher than CD s and offer a tax deferral benefit, thereby increasing net returns due to the lack of taxes being paid as long as the earnings are not withdrawn. You fund the annuity with a single amount and chose the time period in years that you want the guaranteed return. Three, Five and Seven years are currently the most popular guaranteed time periods. Withdrawals of the Accumulated Interest also known as the earnings can be made annually, but would be subject to taxation. Principal withdrawals would be subject to surrender charges. Surrender charges normally start at the same number as the number of years of the annuity. For example, if the annuity is 5 years with a guarantee to pay a specific interest rate for the total annuity time period of 5 years, the surrender charge would be 5% of the principal withdrawn year one, 4% year if done year two, going down 1% each year. Many MYGA s have benefit riders that waive surrender charges if the annuitant has a terminal illness or is confined to a nursing home after one year has passed into the annuity. If the annuitant dies, the beneficiary will receive the account value with no surrender charge. Chapter 6 : Variable Annuities Variable annuities are a combination of Mutual Funds with insurance benefits such as Death or Income benefits. Variable annuities are offered by financial advisors that have a securities license. Since Variable annuities offer a group of Mutual Funds that range from aggressive high risk/reward funds to lower risk/reward bond funds. It attempts to replicate the performance of Mutual Funds. When the stock market is increasing, the hope is that the Variable annuity account value will go up in value similar to the Mutual Funds. In a rising stock market, the account value performance of Variable annuities can be the highest performer of the two types of annuities. This benefit has been a challenge over the last 10-20 years. The two primary obstacles to this performance have been cost and losses. Obstacle one is Cost. Variable annuities have two types of companies involved, the insurance company that provides the annuity and the mutual fund company that provides the investments for the account value called the sub-accounts. Both the insurance company and the mutual fund company have costs to administer the Variable annuity and the underlying investments in the sub-accounts. Additionally, you have two regulatory groups involved, State Departments of Insurance and the Securities and Exchange Commission adding to the complexity and cost. The
Page10 Annual costs of variable annuities have typically averaged 2-3% of the account value. These expenses are higher than other types annuities. Obstacle two is Losses. Since variable annuity funds are invested in different mutual funds losses do happen. The principal is at risk. All types of mutual funds have losses including Bond funds. An asset allocation fund of equity and bond Mutual Funds had losses for a typical Mutual Fund investor in the years 2001, 2002, 2008 and 2011. In 2008 the losses were -30%. You would need a 42.8% increase to get back to even. The two obstacles for Variable annuities Cost and Losses have limited annual returns over the last 10-20 years to 2-3% which is about the same as inflation. An additional concern for Variable annuity purchasers is the timing of the losses to principal. The below table illustrates how timing of losses can negatively affect when to start taking income. Asset allocation funds (attempts to replicate a blend of bond and equity funds) Date = start of each year 2008 2009 2010 2011 2012 2013 2014 2015 2016 Principal 100,000 68,000 79,560 85,129 82,575 92,484 103,358 103,358 100,257 Yearly change ** -32% +17% 7% -3% +7% +12% 0.0 % -3%??? ** Yearly change is based on DALBAR S 21 st annual Quantitative Analysis of Investor Behavior 2015 Advisor Edition plus 2% annual annuity fees.(rounded to an even % and $) Specific Variable annuity performance could be better based on the mutual funds chosen and their individual performance. Past performance is no guarantee of future performance. It took 6 years to get back 100% of the Principal and 2 years later it has changed little. The goal is to take income when you need it, not wait 6 years. If you have to take it after losses, it reduces the income payments significantly. The typical benefit riders offered with Variable annuities are Income and Death. They have higher cost due to the complexity of the annuity. Due to the higher cost of the benefits, account values can be impacted resulting in net benefits payouts many times lower than other annuities. This guide covers the key categories of annuities, outlining the typical features and benefits of them. It covers the primary ways they work and will create a knowledgeable framework on which type could best meet your needs. However, this is only a summary and does not cover all possible options that can be available.
Page11 Our specialists at CLA USA have the expertise and wisdom to help you and your family. a) If you are 2-20 years from retirement, we can help. b) If you need to increase your Income in Retirement, we can help. c) If you are frustrated with the stock market and the traditional investment advice you have been given, we can help. d) If you need to make sure you don t out live your money in retirement, we can help. e) If you want to find a better way to handle long-term care needs, we can help. We have 40,000+ clients we have helped over the years, so we are confident that we can help you and your family. Contact us and we can help.