What your clients need to know about annuities

Sun Life Institute What your clients need to know about annuities Learn the basics and help them get to retirement Presented by: Scott McIntyre Regional Vice President Sun Life Financial Distributors, Inc. 8-19-11 NOT FDIC/NCUA INSURED MAY LOSE VALUE NO BANK/CREDIT UNION GUARANTEE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY Course announcements One (1) Hour of Insurance CE Designation Credit available at student request CFP, CPE/CPA, CLU/ChFC, CIMA, CRPC, NY CPE, TX CPA, RP Completely fill out attendance sheet Omissions/illegible printing will delay credit Indicate type of credit needed Certificates of Completion will be sent once the course completions are processed by Quest CE Retain the original or a copy of your certificate for your records Forward a copy to your state s department of insurance or to your firm s home office, if required 1

Americans are not hopeful about retirement "AMERICANS' CONFIDENCE IN THEIR ABILITY TO AFFORD A COMFORTABLE RETIREMENT HAS PLUNGED TO A NEW LOW." Source: Retirement 101: How to Figure Out What You'll Need by BRETT ARENDS, Wall Street Journal R.O.I., WSJ.com, March 23, 2011 based on a survey from the Employee Benefits Research Institute. They are not financially prepared Just 42% of Americans surveyed have tried to work out how much they'll need in retirement. To generate $10,000 a year and last up to 30 years, you d want to start with about a $200,000 portfolio. To generate $50,000 a year, you d want to start with $1 MILLION Those falling short will need TO SAVE, SAVE AND SAVE EVEN MORE. THE SOONER THEY START, THE MORE LIKELY THEY ARE TO MAKE IT. Source: Retirement 101: How to Figure Out What You'll Need by BRETT ARENDS, Wall Street Journal R.O.I., WSJ.com, March 23, 2011 based on a survey from the Employee Benefits Research Institute 2

Will your clients get to retirement? Help your clients get to retirement What you can do: make investments tax efficient provide guaranteed income in retirement help them keep pace with inflation protect their principal for beneficiaries give them access to professional money management Variable annuities with living benefits can help to do all of this for your clients. 1 1. By adding a living benefit to a variable annuity for an additional cost, clients can protect the income producing power of their initial investment even if their principal decreases because of market fluctuation, as long as benefit and contract requirements are met and the benefit and contract remain in force. Moreover, a death benefit can guarantee return of purchase payments (less any prior withdrawals) to a beneficiary. Guarantees are based on the claims-paying ability of the issuing insurance company, and do not apply to the safety or performance of the underlying investment options. There is no additional tax-deferral benefit for annuities purchased in an IRA, since these plans are already afforded tax-deferred status. Thus, an annuity should be purchased in an IRA only if clients value some of the other features of the annuity and are willing to incur any additional costs associated with the annuity to receive such benefits. 3

Compare them to other investment vehicles How they can get clients to retirement Basic features of an annuity: Long-term financial vehicle to save money tax deferred 2 for retirement Reliable source of income in retirement that protects against outliving assets Helps protect loved ones through death benefits 2. There is no additional tax-deferral benefit for annuities purchased in an IRA, since these plans are already afforded tax-deferred status. Thus, an annuity should be purchased in an IRA only if you value some of the other features of the annuity and are willing to incur any additional costs associated with the annuity to receive such benefits. 4

In addition, a variable annuity can offer: Optional living benefits that protect income against market loss. 1 Investment options so clients can invest for potential growth to keep pace with inflation. 1. By adding a living benefit to a variable annuity for an additional cost, clients can obtain protection from market losses as long as benefit and contract requirements are met and the benefit and contract remain in force. Guarantees are based on the claims-paying ability of the issuing insurance company, and do not apply to the safety or performance of the underlying investment options. Combines many of the features of these products Retirement Plans Mutual Funds Variable Annuities Insurance 5

When are annuities used in retirement planning? Maxed out retirement plan contributions; seeks tax deferral on additional investments Not covered by a retirement plan Wants protection against market losses Concerned about outliving income Concerned about keeping up with rising costs Wants to maintain current lifestyle in retirement There are five simple reasons why your clients may need variable annuities: 1. Tax efficiency 4,5 2. Guaranteed lifetime income 1,2 3. Guaranteed growth 1,2 4. Guaranteed principal 1,3,5 5. Professional money management 4,5 1. As long as contract and benefit conditions are met and contract and benefit remain in force. Guarantees are based on the claimspaying ability of the issuing insurance company and do not apply to the safety or performance of the underlying investment options. 2. Lifetime income payments under a living benefit are typically calculated as a percentage of a withdrawal benefit base, adjusted for certain withdrawals. The withdrawal benefit base is calculated independently of, and has no direct relationship to, the variable annuity s account value. Only the account value is subject to investment gains and losses. Withdrawals that exceed a specified percentage of the withdrawal base may severely reduce your clients annual income amount, especially if taken in a down market, and may be subject to surrender charges if applicable. 3. A variable annuity may guarantee a return of all premium payments (less withdrawals) when left to beneficiaries though a death benefit. See specific annuity prospectus for details. 4. There is no additional tax-deferral benefit for annuities purchased in an IRA, since these plans are already afforded tax-deferred status. Thus, an annuity should be purchased in an IRA only if your client values some of the other features of the annuity and is willing to incur any additional costs associated with the annuity to receive such benefits. 5. This feature is typically available with or without a living benefit. 6

RETIREMENT TIP Variable annuities are tax deferred. Because only withdrawals are taxed, tax-deferred investments ALLOW ASSETS TO ACCUMULATE AT A MUCH FASTER RATE. 1. Tax Efficiency The advantages of tax deferral Earnings compound without current income tax. Account value can grow faster because clients don t pay taxes until they actually take withdrawals or income payouts. Tax-deferral applies to both after-tax (nonqualified) and pretax (qualified) dollars. IRAs and qualified plans plans are already tax-deferred. There is no additional tax-deferral benefit for annuities purchased in an IRA, since these plans are already afforded tax-deferred status. Thus, an annuity should be purchased in an IRA only if your client values some of the other features of the annuity and is willing to incur any additional costs associated with the annuity to receive such benefits. 7

Your clients may be maxed out, and most retirement plan limits have not increased 401(k), 403(b), and 457(b) elective deferral limit is $16,500 Catch-up contribution limit for plans remains at $5,500 Limit under defined benefit plans remains at $195,000 Limit for defined contribution plans remains at $49,000 Tax-deferred growth helps protect your clients from rising tax rates Adding an annuity to your clients retirement portfolio will give them more opportunity for tax-deferred growth 2013 may bring significant tax increases Your clients need to prepare NOW 8

Through tax deferral and tax-efficient transfers, variable annuities provide a measure of tax control. Transfers are tax free When a subaccount or investment option held within a variable annuity is sold or exchanged for another subaccount or investment option within the same variable annuity, there are no additional commissions or income taxes to pay. If clients make withdrawals from the variable annuity itself, the accumulation units they redeem may be worth more or less than their original cost. Withdrawals may be subject to withdrawal charges, surrender charges, and income taxes and, if made before age 59½, to a federal income tax penalty as well. One of the conditions of participating in a living benefit may be a restriction on funds in which clients may invest or in the amounts that they can invest in any fund. Market timing is not permitted. 9

RETIREMENT TIP An annuity can provide GUARANTEED LIFETIME INCOME 2. Guaranteed Lifetime Income Like a pension or Social Security benefits, a variable annuity can provide your client with income for life. unlike a 401(k) or IRA, which could run out. With a VA, this would work in one of two ways: 1. A stream of periodic payments for life or a specific period (this is called annuitization). 2. Guaranteed income for life, which is available by electing a living benefit for an additional fee. 10

It s tough to count on the market; will your clients survive another dip like this one? Your clients have suffered losses In the most recent market downturn, 2.2 million Americans between the ages of 56 and 65 lost, on average, between 23% and 24.5% on their 401(k) plans. Source: Retirement Dreams Deferred, Financial Advisor Magazine, January 2009. Data as of early December 2008 and reported from Employee Benefits Research Institute (EBRI). 11

Why is guaranteed income important? Guaranteed income helps protects clients income from market losses that affect income-producing assets Once your clients start withdrawing money in retirement, market losses could shorten the years the income could last. Let s take a look THE EARLIER THE RETURNS ARE POSITIVE, THE LONGER THE PORTFOLIO MAY LAST To protect retirement savings from the risk of withdrawing too much too soon from a shrinking portfolio, consider income solutions that minimize the impact of market fluctuations and downturns. 12

Why else do clients need guaranteed income that lasts a lifetime? Your clients could spend 20, 30 or even 40 years in retirement. AN ANNUITY IS THE ONLY INVESTMENT THAT CAN PROVIDE INCOME FOR A LIFETIME. RETIREMENT TIP Some VAs offer ANNUAL GROWTH on the benefit base used to determine future withdrawals 13

3. Guaranteed Growth Why is guaranteed growth important? In order to support their current lifestyle, your clients need investment growth potential. A VA can offer growth potential through its investment subaccounts AND through a bonus that is credited to the benefit base and can provide 7% guaranteed annually for the first 10 years your clients don t make a withdrawal. Guaranteed 7% growth for future income assuming a flat market $25,500 annually for life $510k $300k Age 59 60 61 62 63 64 65 66 67 68 69 Withdrawal Benefit Base increasing by 7% annually In this hypothetical example, the Withdrawal Benefit Base is guaranteed to grow by 7% ($21k) of the annuity Bonus Base for each year no withdrawals are taken (during the first 10 contract years). By increasing the Withdrawal Benefit Base, a client automatically increases his or her annual income Withdrawal Amount. At the end of 10 years the Withdrawal Benefit Base equals $510k. Assuming that the living benefit allows withdrawals of up to 5%, the client could be guaranteed up to $25,500 annually for life, regardless of the account value of the annuity. This graph illustrates an initial investment by an owner aged 59 in a hypothetical variable annuity with the living benefit elected at issue. The graph illustrates the guaranteed maximum income amount available if the owner delays withdrawals for 10 years. Hypothetical results are for the purposes of showing only how an income benefit works and are not intended to predict or project the future market performance of any subaccount within a particular variable annuity or the contract value of any particular variable annuity. Past performance does not guarantee future results. 14

RETIREMENT TIP A variable annuity with a living benefit can guarantee 100% OF YOUR CLIENTS PRINCIPAL (less any withdrawals they have taken) returned to their beneficiaries through a death benefit. 4. Guarantees principal Return of principal and tax-efficient transfer to the next generation The death benefit ensures that if a client doesn t use the annuity assets for retirement, the original principal is guaranteed for his or her beneficiaries. 15

RETIREMENT TIP A variable annuity can provide access to the SAME INVESTMENT MANAGERS THAT MANAGE YOUR CLIENTS MUTUAL FUNDS. 5. Professional Money Management Investing with more freedom Investing in a variable annuity with a living benefit offers more freedom to invest for potential growth because of the available guarantees. One of the conditions of participating in a living benefit may be a restriction on funds in which clients may invest or on the amounts that clients can invest in any fund. 16

Investor Experience The investor s chief problem and even his worst enemy is likely to be himself. -Benjamin Graham 13.2% 0% 3.7% Average Investor S&P 500 Index 1984-2004 historical stock market data as represented by the S&P 500 Index which is an unmanaged group of securities considered to be representative of the stock market in general. An investment cannot be made directly in an index. Results assume reinvestment of dividends. Past performance is no guarantee of future results. The results of the indices shown are illustrative and do not reflect the performance of any specific investment vehicle. Source: Dalbar, Inc., Quantitative Analysis of Investor Behavior, 2005. Past performance is not indicative of future results. Compare them to other investment vehicles How they can get clients to retirement 17

Compare them to other investments RETIREMENT TIP VARIABLE ANNUITIES, WITH THEIR GUARANTEES AND FEES, ARE WORTH IT. That s why 89% of annuity investors elected a living benefit when one was offered, despite the cost. LIMRA Variable Annuity Guaranteed Living Benefit Election Tracking Survey, 4th Quarter 2008. Compare them to other investments Compared to mutual funds and separately managed accounts: FEES AND EXPENSES Fund Expense M&E 5 Total Fee difference from variable annuities Living Benefit Rider 6 Variable Annuities 1 1.11% 1.35% 2.46% 1.10% Mutual Funds 2,3 1.50% 1.50% -.96% Managed Accounts 4 1.69% 1.69% -.77% The average annual cost of mutual fund ownership, including income taxes, can be as high as 4.63% 7 VAs with living benefits are worth the cost. ` 1. These variable annuity sample fees are based on the Sun Life Financial Masters Choice II product with the Sun Income Maximizer SM living benefit. The cost may increase or decrease at any time but will never exceed 1.75% (1.95% for joint life coverage). 2. Average annual expense charged for typical mutual fund purchased through a financial professional, including 12b-1 fees.3 3. Investing with Variable Annuities, John P. Huggard, JD, CFP, 2009. 4. Percentage is of assets under management. Source: Cerulli, 2008. Cost includes advisor fees, sponsor fees, and custody agent fees. 5. Includes mortality and expense risk of 1.05% in addition to administrative expenses of.15%, and distribution expenses of.15%. 6. Please note that some living benefit fees are calculated as a percentage of the account value and some as a percentage of the living benefit base, which could be higher than the account value. 7. Investing with Variable Annuities 2009: The Truth About Variable Annuities 2009, John P. Huggard, JD, CFP, ChFC, CLU. 18

Compare them to other investments Safety Each can be subject to market fluctuations Liquidity Money available in a few days with each Investments Variety of investment options available with each Variable Annuities Mutual Funds Managed Accounts Potential loss of principal; however, in the event of death, principal (less prior withdrawals) is guaranteed through a death benefit. 2 A living benefit (available at additional cost) guarantees annual lifetime income amount based on initial principal. 3 Regular withdrawals up to a free withdrawal amount can be taken annually without charge. 3 Access to same investment managers that manage mutual funds. There are some investment restrictions with a living benefit; however, some living benefits can guarantee 7% annual growth of benefit base. 3 Potential loss of principal. Withdrawals impacted by upfront, nonrefundable A share commission or contingent deferred B share sales charge. 1 May also be redemption fees. Fund managers establish objectives and manage toward them. Potential loss of principal. Potential loss of asset-based management fee. Since securities are directly owned by client, assets are exposed to stock liquidity risks such as selling in a down market. Can be customized to client s specific investment and tax requirements. However, trying to customize the portfolio too much can hinder the manager s ability to pursue the account s investment objectives. 4 1. Investing with Variable Annuities, John P. Huggard, JD, CFP, 2009. 2. As long as contract and benefit conditions are met and contract and benefit remain in force. Guarantees are based on the claims-paying ability of the issuing insurance company and do not apply to the safety or performance of the underlying investment options. 3. Lifetime income payments under a living benefit are typically calculated as a percentage of a withdrawal benefit base, adjusted for certain withdrawals. The withdrawal benefit base is calculated independently of, and has no direct relationship to, the variable annuity s account value. Only the account value is subject to investment gains and losses. Withdrawals that exceed a specified percentage of the withdrawal base may severely reduce your clients annual income amount, especially if taken in a down market, and may be subject to surrender charges if applicable. 4. Understanding Managed Accounts, MFS, 2005. Compare them to other investments RETIREMENT TIP Unlike other investments, with a variable annuity, clients can move money among investment options WITHOUT HAVING TO PAY INCOME TAXES, CAPITAL GAINS TAXES, OR ADDITIONAL FEES. If clients make withdrawals from the variable annuity itself, the accumulation units they redeem may be worth more or less than their original cost. Withdrawals may be subject to withdrawal charges, surrender charges, and income taxes and, if made before age 59½, to a federal income tax penalty as well. One of the conditions of participating in a living benefit may be a restriction on funds in which clients may invest or in the amounts that they can invest in any fund. Market timing is not permitted. 19

Compare them to other investments Short-term capital gains are taxed as ordinary income: Taxable income Long-term capital gains Short-term capital gains Interest* Currently 15% (for income tax brackets of 25% and above) 1 Ordinary income Ordinary income Taxed as: Dividends* Qualified dividend income** is taxed at the capital gains rate 1 *Unless tax exempt. **Qualified dividend income is defined as dividends received during the tax year from a domestic corporation or a qualified foreign corporation. Ordinary dividends are taxed as ordinary income. 1. Clients in the marginal tax bracket of 25% and above are taxed on long-term capital gains at a tax rate of 15%. Those in tax brackets under 25% (15% or below) are exempt from long-term capital gains tax. There is no assurance that current tax laws will remain in effect. There is no additional tax-deferral benefit for annuities purchased in an IRA, since these plans are already afforded tax-deferred status. Thus, an annuity should be purchased in an IRA only if your client values some of the other features of the annuity and is willing to incur any additional costs associated with the annuity to receive such benefits. Compare them to other investments A couple with an annual retirement income of $90,000 could have an effective tax rate of just 14.31%... Even if all this income is from an annuity: 2011 Annual Variable Annuity Distribution Calculation Gross income Standard itemized deduction Standard exemption Taxable income $90,000 $11,600 $7,400 $71,000 20

Compare them to other investments Using a taxable income of $71,000, here s how this sample client s effective tax rate is actually calculated: How the Effective Tax Rate Is Calculated: 2011 tax rates Income ranges for married filing jointly or qualified widow(er) Total taxable income of $71,300 Income tax 10% 15% 25% 28% 33% 35% $0 $17,000 The first $17,000 is taxed at 10% = $1,700 $17,001 $69,000 (plus $1,700) The next $52,000 is taxed at 15% = $7,800 $69,000 $139,350 (plus $9,500) The next $2,000 is taxed at 25% = $500 $139,351 $212,300 (plus $27,088) $212,301 $379,150 (plus $47,514) Over $379,150 (plus $102,575) Total effective tax rate = $10,000/$71,000, or 14.08% Tax liability $10,000 Tax rate source: http://www.irs.gov/pub/irs-drop/rp-07-66.pdf. Compare them to other investment vehicles How they can get clients to retirement 21

How they can get clients to retirement Is a variable annuity with a living benefit right for your clients? Compare costs with benefits when you consider investment options for your clients retirement money. Think about their retirement goals and tolerance for risk. How they can get clients to retirement Will they need income that will last a lifetime? Assess what your clients would need to pay to help protect their investments or to get retirement income they can count on versus what they could lose if their retirement assets aren t protected. Wouldn t the protection features be well worth their cost? 22

How they can get clients to retirement If a variable annuity guarantees a level of retirement income, wouldn t that extra cost be worth it especially if the guarantee gave you the comfort level to invest a bit more aggressively in this volatile market? How they can get clients to retirement Once you ve determined that your clients could benefit from a VA with a living benefit, how do they know: How much to invest? Where to get the money from? 23

How they can get clients to retirement Charities 13,000 2,000 5,000 6,000 7,000 3,000 2,500 6,000 6,500 4,000 5,000 2,000 6,000 8,000 4,000 Working with your clients, determine what their expenses will be in retirement then look at sources of income they can count on. 80,000 30,000 24,500 0 54,500 How they can get clients to retirement 80,000 54,500 25,500 25,500 0.05 510,000 Is there a yearly income gap? What should a client invest to fill that gap if the plan is to take income right away? If a client can wait to take income, how much should he or she invest? 10 300,000 24

How they can get clients to retirement 80,000 54,500 25,500 25,500 0.05 510,000 10 300,000 Then, with their input, take an inventory of assets, to determine which of those assets they can use to purchase an annuity, after taking into account any taxes, transaction costs, etc. After taking an inventory of assets, we can determine which of those assets they can use to purchase an annuity. How they can get clients to retirement Variable annuities with living benefits can offer: tax-deferred growth as well as tax-free transfers among investment options guaranteed lifetime income, 1 guaranteed minimum growth of the base used to calculate for future income, regardless of market conditions, 1 protection of principal against market loss for beneficiaries, 2 and experienced, well-respected money managers. 1.Lifetime income benefits are typically offered through an optional living benefit, which is available with a variable annuity for an additional cost. These benefits have conditions for participation; for example, the participant may be required to limit investments to designated options. If premiums or account values are allocated to other funds, the benefit may be cancelled and cannot be renewed. There also may be restrictions on the age at which guaranteed payments may begin. Premature withdrawals or withdrawals in excess of the guaranteed amounts may substantially impact contract guarantees and values. Withdrawals from an annuity are subject to income tax, and if made before age 59½, a federal income tax penalty also may apply. Guarantees are subject to the claims-paying ability of the issuing insurer. Please refer to the appropriate annuity prospectus for complete details. 2. A variable annuity may guarantee a return of all premium payments (less withdrawals) when left to beneficiaries though a death benefit. See specific annuity prospectus for details. 25

Summary Recognize how a variable annuity with a living benefit can help clients get to retirement Compare a variable annuity with a living benefit with the investments they are using now Help them determine which assets to turn into a variable annuity with a living benefit Thank you Annuities are long-term financial vehicles designed for retirement purposes. Variable annuities provide tax deferral, a lifetime income stream, and a death benefit. Clients should consider the investment objectives, risks, charges, and expenses (e.g., mortality and expense risk charges, administration expenses, and surrender charges) of an investment carefully before investing. Please read all prospectuses, which can be obtained from your annuity wholesaler of the Sun Life Financial sales desk, carefully before investing or sending money for your clients. Sun Life Financial, its distributors, and its respective representatives do not provide tax, accounting, or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Clients should consult their own independent advisors about any tax, accounting, or legal statements made herein. There is no assurance that current tax laws will remain in effect. Variable annuity accumulation unit values fluctuate according to underlying economic and market conditions. It is possible that clients could lose up to the entire principal amount invested at redemption. Income taxes are due on taxable amounts upon withdrawal. Guarantees do not apply to the performance or safety of amounts held in the variable investment options. All withdrawals from variable annuities of taxable amounts, including earnings, are taxable as ordinary income and, if taken prior to age 59½, may be subject to a 10% federal tax penalty. Early withdrawals will reduce the death benefit and cash surrender value. Partial withdrawals may be subject to surrender charges if they are in excess of the annual free withdrawal amount. Please see the prospectus for details including the impact of withdrawals on the guaranteed amounts of the optional benefits. Withdrawals affect all available benefits. Sun Life Financial Masters variable annuities are issued by Sun Life Assurance Company of Canada (U.S.) (Wellesley Hills, MA) in all states except New York. In New York, the contracts are issued by Sun Life Insurance and Annuity Company of New York (New York, NY). Variable products are distributed through Sun Life Financial Distributors, Inc. All three companies are members of the Sun Life Financial group of companies. All contract and rider guarantees, including optional benefits or annuity payout rates, are backed by the claims-paying ability of the issuing insurance company. They are not backed by the broker/dealer from which this annuity is purchased, by the insurance agency from which this annuity is purchased or any affiliates of those entities and none makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company. 2011 Sun Life Assurance Company of Canada (U.S.). All rights reserved. Sun Life Financial and the globe symbol are registered trademarks of Sun Life Assurance Company of Canada. GX24-10851 (Exp. 04/13) SLPC 23154 (04/11) 26