BUILDING WEALTH AND ADDING STABILITY WITH A VARIABLE ANNUITY What is a variable annuity and when is it a good fit for a client s portfolio? VARIABLE ANNUITY ADVISOR BROCHURE
WHAT IS A VARIABLE ANNUITY? VARIABLE ANNUITIES (VAs) ARE INVESTMENT VEHICLES THAT HAVE BEEN AROUND FOR DECADES AND HAVE SEEN A RECENT REBOUND IN POPULARITY SINCE THE LATEST RECESSIONS. At its core, a VA is a contract between a purchaser and an insurance company. VAs were initially developed by insurance companies as a vehicle that offers tax-deferred savings with growth potential as well as a combination of investment and insurance features. To buy an annuity, a purchaser makes a single payment or a series of payments (depending on the rules of the particular annuity). Although tax-deferred growth is a big draw of VAs, other key features that appeal to consumers include: A guaranteed income stream Provides fixed periodic payments that are guaranteed for a period of time specified by the owner. This can be accomplished by annuitizing the contract, which converts the money into a steady income stream. It can also be accomplished with a rider, which, for an additional cost, can offer more flexibility and control than annuitization. Investment options Enables the owner to invest annuity payments into investment options (e.g., sub-accounts made up of mutual funds that invest in equities, bonds and/or fixed interest vehicles), providing the opportunity for growth of savings and diversification. Death benefit Provides a lump-sum payment to a named beneficiary upon the owner s passing.
What to look for in a variable annuity LOW COSTS One common criticism of VAs is their high cost compared to stand-alone mutual funds. For example, the fees associated with owning a VA can include: Mortality and expense (M&E) fee The cost for funding the death benefit and for managing the product. Administrative fee Typically covers expenses related to record keeping and other administrative costs. Underlying investment option/fund fees The management and other associated fees charged by the companies managing the investment options within the VA. Transfer charges The cost for transferring money among investment options in a VA. Rider charges The fee for additional benefits added to a VA. Surrender charges and distribution fees The fee for withdrawing money from a VA. However, not all VAs are built alike, and some offer very competitive fees that leave significantly more money in the account. Over time, this extra money can make a big difference in terms of growth through compounding, as illustrated in the graphic below. Account Value $2,000,000 $1,600,000 $1,200,000 $800,000 $400,000 $0 $280,510 Annual Fee 1% 2% 3% $267,645 $255,256 $393,430 $358,170 $325,779 End of Year 5 End of Year 10 End of Year 20 End of Year 30 $773,937 $641,427 $530,660 $1,522,451 $1,148,698 $864,388 FOR ILLUSTRATIVE PURPOSES ONLY. This hypothetical example does not represent any specific annuity or the performance of any particular investment options. It compares three variable annuity investments of $200,000 with total annual fees of 1%, 2% and 3%. Each annuity is accumulating at a hypothetical annual rate of return of 8%, minus the annuity/portfolio charges, and assumes reinvestment of earnings and no withdrawals. Rates of return may vary. STRENGTH OF ISSUER Not every insurance company that issues VAs is equal. Some companies are more financially stable than others and in a better position to pay their obligations to shareholders. In the case of a VA, this translates into the ability to honor the terms of the annuity contract, including paying the guaranteed lifetime income. Companies like Standard & Poor s, Moody s and A.M. Best provide ratings for financial services firms. For firms that are most likely to honor their obligations, look for those that rank in the top one or two categories from each ratings service. FLEXIBILITY Investment vehicles with a wide variety of options can provide the most flexibility, adapting to consumer needs when they change. VAs are built to provide consumers with options regarding investment choices and a guaranteed income, but the most versatile VAs offer even more flexibility, such as the ability to: Move money among investment options or rebalance without penalties. Withdraw money at any point without penalties or surrender charges. Because life can change so quickly, consumers may find it helpful to seek out VAs that offer the most freedom and flexibility.
When is a variable annuity the right fit? FOR A STABLE, GUARANTEED SOURCE OF INCOME One feature of VAs that appeals to many people especially those nearing retirement is the guarantee of fixed, periodic payouts over the course of retirement. This is especially true for those who have regular expenses (like mortgages, insurance premiums, health care payments, etc.) that they need to ensure are covered over a long period of time. A guaranteed source of income can give them confidence that they will be able to meet these and other financial obligations down the road. One way to receive a guaranteed source of income is via a Guaranteed Lifetime Withdrawal Benefit 1 (GLWB). A GLWB is a rider that provides a guaranteed minimum withdrawal from the invested amount on an annual basis, while still retaining control over the annuity. Typically, the withdrawal amount is a specific percentage of the annuity value. HERE S HOW THE GLWB PORTION OF A VA GENERALLY WORKS: 1 The client puts money into one or more designated sub-accounts, the value of which establishes a foundation for his or her guaranteed annual withdrawal amount. Please note that because the GLWB portion of a VA is limited to one or more designated sub-accounts, the guaranteed income will be limited to the performance of these sub-accounts. 2 The client decides when he or she wants to start taking withdrawals. 3 4 5 Upon distribution of the first retirement income payment, the guaranteed annual income is established, or locked in. There may be opportunities to increase this guaranteed amount, based on the terms of the GLWB. Regular, predictable payments based on the guaranteed annual income are made to the client for the rest of his or her life (or lives, if a joint option is available). Withdrawals come from the money held in the account. If the account value runs out, payments continue for life, guaranteed by the issuing insurance company. However, keep in mind that the client may not live long enough to realize a benefit from the GLWB. Additionally, the designated sub-account(s) may perform well enough that the client may not need the guarantee. This income is guaranteed by the insurance company, even if the account balance reaches zero due to taking withdrawals or market volatility. For an example of how the GLWB may help, see Essential Expenses vs. Discretionary Spending on the next page. FOR POTENTIAL GROWTH OF SAVINGS What separates VAs from fixed annuities is the ability to benefit from market growth by investing in a wide range of sub-account options. The more investment options available, the more flexibility the client will typically have. The more accommodating VA products offer investment options in a wide range of asset classes. This allows investors to diversify their investments and choose the ones that best suit their investment strategy. In addition, it provides them with viable alternatives when their investment goals change. The investment options are often sub-accounts made up of mutual funds that invest in stocks, bonds and fixed interest vehicles, and the value of a VA depends on the performance of the investment options chosen, as investment return and principal value of a variable investment will fluctuate so that an investor s units, when redeemed, may be worth more or less than the original cost. 1 Additional fees apply.
When is a variable annuity the right fit? FOR MANAGING RISK It s a fact of life that people on average now live longer lives, and it s not uncommon for people to live 20 to 30 years or more into retirement. This increases the odds of outliving their retirement savings, making it a priority for many to preserve their nest egg and make it last as long as possible. As recent market volatility has shown, investments are at risk of losing significant value, and such losses could severely affect one s ability to fund his or her entire retirement. VAs can help preserve a portion of the client s retirement income when he or she moves money into the VA, chooses a GLWB, and starts receiving a guaranteed income. ESSENTIAL EXPENSES VS. DISCRETIONARY SPENDING It s wise to review potential retirement costs with your clients. Their retirement expenses will typically fall into two categories. Essential Expenses are just that, the essentials housing, groceries, clothes, health care, etc. The rest fall into the Discretionary Spending category: the costs for things they d like to do in retirement vacations, club memberships, perhaps a new hobby. Will they have enough to cover all the things they d like to do with their free time? Refer to the chart at right: If Essential Expenses refers to costs your clients say they will definitely have for the rest of their life, then it makes sense that they should have Lifetime Income Sources to meet these needs. If there is a gap between what Social Security, pensions, and other income sources currently provide, it creates Gap A. Your clients would then need to consider converting their Managed Income Sources into Lifetime Income Sources through a guaranteed income and asset allocation strategy in order to meet their Essential Expenses. After Essential Expenses are taken care of, Discretionary Spending needs must be met with the remaining Managed Income Sources. If there is not enough in the remaining Managed Income Sources to cover your clients Discretionary Spending, that creates Gap B. The client must then determine what s more important: when they retire, or the lifestyle they want to live in retirement. Essential Expenses Fill Income GAP A Lifetime Income Sources Social Security Pensions Annuities Other lifetime income sources Lifetime Income Conversion Discretionary Spending Fill Income GAP B Managed Income Sources Taxable assets Personal retirement accounts Employment income Other variable sources FOR ILLUSTRATIVE PURPOSES ONLY. Intended to show that assets can be converted into a guaranteed income stream to fill a gap between income and expenses.
How to compare different variable annuities PRODUCT FEATURES The features of VAs can differ widely from product to product. Here are a few areas to compare when considering which VA to buy. Costs Elements to compare include: M&E costs (both with and without the death benefit option). Range of investment option management fees. Surrender charges (including the time period after purchase when they would apply). Rider charges. Other administrative fees and charges. Investment options Elements to compare include: Number of total options available. Variety of asset classes. Ability to rebalance or transfer monies from one fund to another without restrictions. Rider features Elements to compare include: Rider flexibility. Ability to upgrade. Number of investment options available with the rider. How income is calculated. Withdrawal abilities Elements to compare include: When and how withdrawals are permitted. Whether surrender charges apply and, if so, how much they are. Simplicity of use Although this element is more subjective, some VAs are simply easier to understand than others when it comes to rules and policies. If a particular product has complicated or rigid requirements, it may be in the consumer s best interest to look at other, more flexible and straightforward products before any decisions are made. Before purchasing an annuity, consumers should carefully consider its investment options objectives and all the risks, charges and expenses associated with the annuity and its investment options. For this and other important information, please visit greatwestsmarttrack.com or firstgreatwestsmarttrackny.com in New York, to request an annuity prospectus, or you can view the prospectus for the annuity or its underlying funds online. Please read prospectuses carefully before investing or sending money. For more information on how a variable annuity can complement your clients portfolios, visit greatwestsmarttrack.com or call 1-877-703-6979. In New York, please visit firstgreatwestsmarttrackny.com. The principal underwriter is GWFS Equities, Inc., Member FINRA/SIPC, and securities, when offered, are offered through GWFS Equities, Inc. and/or other broker dealers. GWFS Equities, Inc., Member FINRA/SIPC, is a wholly owned subsidiary of Great-West Life & Annuity Insurance Company and an affiliate of Great-West Life & Annuity Insurance Company of New York. Variable annuities are sold by prospectus only. The investment return and principal value of a variable annuity will fluctuate so that an investor s units, when redeemed, may be more or less than their original cost. Variable annuities are suitable for long-term goals, such as retirement, and under current federal tax law, any withdrawals of earnings prior to age 59½ may be subject to income tax and a 10% federal tax penalty. Access to the website and call center may be limited or unavailable during periods of peak demand, market volatility, systems upgrades/ maintenance or other reasons. Great-West Financial SM refers to products and services provided by Great-West Life & Annuity Insurance Company; Great-West Life & Annuity Insurance Company of New York; their affiliates and subsidiaries. The trademarks, logos, service marks, and design elements used are owned by Great-West Life & Annuity Insurance Company. Interstate Compact contract form numbers ICC11-J555 Series (Individual Flexible Premium Variable Annuity) and ICC11-J555-GLWB Series (Guaranteed Lifetime Withdrawal Benefit Rider) are issued by Great-West Life & Annuity Insurance Company; Corporate Headquarters: Greenwood Village, CO. Great-West Life & Annuity Insurance Company is not licensed to do business in New York. In New York, Policy contract numbers J555-NY Series (Individual Flexible Premium Variable Annuity) and J555-GLWB-NY Series (Guaranteed Lifetime Withdrawal Benefit Rider) are issued by Great-West Life & Annuity Insurance Company of New York; Home Office: White Plains, NY. Contracts issued by Great- West Life & Annuity Insurance Company of New York are only available in the state of New York. 2013 Great-West Life & Annuity Insurance Company. All rights reserved. B1008ABG (03/13) 157827