Equity Indexed Annuities Peter Buechler CLU, FLMI, AAPA Manager, Annuity Marketing CPS INSURANCE SERVICES For Agent use only/Not for use with the general public

Agenda 6/15/05 Webinar Duration Mins What is an EIA Typical Client Types of EIA’s Minimum Guarantees Growth Adjusting Factors Examples –Annual Reset Point to Point –Annual Reset w/ Monthly Average –Annual Reset w/ Performance Trigger –Annual Reset w/ Monthly Pt to Pt Client Handouts Questions

What is an Equity Indexed Annuity (EIA) Fixed Annuity- Guarantee of Principal Benefits linked to an external equity reference or an equity index (Typically S&P 500). YOUR CLIENT IS NOT DIRECTLY PARTICIPATING IN THE MARKET Can be Immediate or Deferred –Deferred- (Most Common) Monies allowed to accumulate tax deferred –Immediate- Income payments (Annuitization) to begin within 1 year of issue

Typical Client Wants Guarantee of Principal Is dissatisfied with fixed returns Can sustain year(s) with little or no account growth Does not need systematic withdrawals Does not need to access funds until age 59.5 Can understand somewhat complex product designs

Types of EIA’s Annual Reset/Ratchet Point to Point Annual Reset/Ratchet w/ Monthly Average Annual Reset/Ratchet Performance Trigger Account Annual Reset/Ratchet w/ Monthly Point to Point Annual Reset/Ratchet w/ Daily Average Contract Term Point to Point High Water Mark and more…

Definitions Premium- Premium deposits can be Single or Flexible (ongoing) – If flexible do they reset surrender charges? Accumulated Value (AV)- Premium and any credited earnings Surrender Value- AV less any surrender charges Policy Anniversary- Date of policy issue. Index Anniversary- Date Index values are measured. (if this date falls on a non-trading day, carrier will measure the previous or following trading day)

Minimum Guarantees Can be applied to Premium (Prem) or Accumulated Value (AV) Premium Guarantee – Most common, Compound your premium (or % of) at set rate and compare to Accum Value, client gets the higher value. (2 lines of money) E.g.. 90% of premium at 3% –100K prem, 10yr contract - 3% for 10yrs = $120,952 or 1.92% AEY Accum Value Guar- If credited index earnings are not at least as high as set min. then entire AV is credited min. (1 line of money)

Index growth adjusting factors Participation Rate (PR)-Specifies the % increase in the index growth that you will “participate” in. Spread- AKA:Margin, Fee - Subtracted from index growth before earnings are credited. Cap Rate- (Cap) 2 types- –INTEREST CAP-Caps the max. amount of interest you can earn after application of adjusting factors (PR, and spread). –INDEX CAP- Caps Index growth before applying adjusting factors Performance Trigger Account Credited Interest- Specified interest rate credited to account as long as index does not decline Adjusting Factors can change on policy anniversary typically subject to min/max

Annual Reset/Ratchet Point to Point Most Popular Design Easiest to understand / explain Compares the index starting value on the policy’s index start date to index ending value on the index anniversary.(Index Anniv and Pol Anniv may be 2 different dates) Apply adjusting factors i.e.. PR, CAP, Spread Earnings are locked in (Ratcheted)

Annual Reset/Ratchet Pt to Pt 100K prem, 100% PR, 6.25% earnings cap, No spread. Min Guar = 2% on 100% of AV (Lafayette Life Marquis advant-edge) Year 1 –Pol index date 1/15/04 index value = 900. Index Anniv 1/15/05 index = 980 – =80 pt increase; 80/900= 8.89% index growth –Apply 100% PR=8.89% then cap at 6.25%. –You earn 6.25% for this contract yr. end of yr 1 = $106,250

Year 2 AV= $106,250, Index start date 1/15/05, value = 980 Compare to 1/15/06 index value = 970 – = -10 (Negative year but no reduction to AV due to ratcheting) Minimum Growth Guaranteed –2% on 100% of AV = 2% on $106,250 = 108,375 End of Yr 2 AV = 108,375

Bi-Annual Reset/Ratchet point to point Same design as Annual Reset/Ratchet except that it compares index growth over 2 years Will have higher caps & PR, lower spreads Risk of having 2 years pass with no AV growth

Annual Reset/Ratchet with Monthly Average Common design however more Complex than Ann Reset Pt to Pt Compares index starting value on the policy’s index date to the average index value on X day of the month for 12 months after the index starting date. Apply adjusting factors; PR, Cap, Spread Gains locked in. Index Growth typically reduced due to the effects of averaging

Ann Reset/Ratchet w/ Mo. Avg. 100K Premium, 100% PR, 2.30% spread. No Cap. Min Guar = 100% of prem at 1.5% (ING Selectra) Year 1 Pol index date 1/15/04 index value = 1000 Add close of index value for 2/15/04 + 3/15/04 + 4/15/04 … + 1/15/05 = X Divide X by 12 = Mo Avg. index growth If X/12 = 1053 then = 53 ; 53/1000 = 5.30% average index growth Apply Adjusting Factors - PR, Spread, Cap 5.30% mo avg index growth x 100% PR = 5.30% less 2.30% spread = 3.00% AV at end of yr 1 = $103,000

Annual Reset w/ Monthly Average continued Year 2 Accum Value = $103,000 Pol index date 1/15/05 index value = 1100 Avg index value on 15 th day of month for next 12 mo = 920 (Negative index return) No reduction to AV (Ratcheting) Min Guar Value = 1.5% for 2yrs = $103, If client cancels they get the higher of $103,000 or $103,022.50, less surrender charges End of Yr 2 AV = $103,000

Key Points to Consider w/ Mo Avg Last averaged point is the starting point for following year 2 consecutive negative years is more likely than with an Ann Reset Pt to Pt Typically Higher PR & Caps, Lower Spreads Averaging will push values toward the middle; in a rising market avg will be lower than the end point, in a declining market avg will be higher than the end point More complex design

Annual Reset/Ratchet Performance Trigger Account (PTA) Newer EIA crediting method Credits a specified interest rate as long as measured index does not decrease No adjusting factors used, just a fixed credited rate as long as no index decrease Earnings will be credited in a flat market Easy to explain and understand Limited upside potential Works best in a flat or slightly increasing market

Annual Reset Performance Trigger Account 100K deposit, 5.50% PTA crediting rate. Min Guar=100% of 1.75% Jefferson-Pilot New Directions I-66 Year 1 Pol index date 1/15/04 index value = 1000 Pol index Anniv 1/15/05 index value = 1000 There has not been a decline in the index Monies allocated to this account earn 5.50% Accum end of yr 1 = $105,500

PTA example Continued Year 2 Beginning of year 2 AV = $105,500 Pol index date 1/15/05 index value = 1000 Pol index Anniv 1/15/06 index value = 900 No index growth Client does not lose money, but does not receive any credited interest Accum end of year 2 = $105,500 Minimum Guarantee account = $103,530 (100K compounded at 1.75% for 2 years)

Monthly Point to Point annual Reset Newest Design Available Highest Upside potential of many designs Compares increase/decrease in market index on a monthly basis. Monthly increases are capped, decreases are not. Sum of positive and negative months are added up at the end of the year for credited rate. BEWARE !!!- Can easily be misrepresented to clients

Ann Reset/Ratchet w/ Mo. Pt to Pt. 100K Premium, 3% monthly cap, Min Guar = 90% of prem at 3% Pol issue date 8/1/04 S&P = /1/04 S&P=1050 ( = 50/1000= 5% increase) capped at 3%. Growth = + 3% 10/1/04 S&P=900 ( = -150/1050= % decrease) 11/1/04 S&P = 1200 ( =300/900=33% increase, capped at 3%…. Add up all positive and negative months +3, , +3… Earnings are credited on policy anniversary and locked in annually Pros- Large potential upside Cons- Upside growth is capped, downside is not.

CPS EIA Annuity Carriers Allianz Life (AM Best A+) American General (AM Best A+) Fidelity & Guaranty (AM Best A) Equitrust (AM Best A) Lafayette Life (AM Best A) ING/USA (AM Best A+) Business Men's Assurance (AM Best A) Jefferson Pilot (AM Best A++) Lincoln Benefit/Allstate (AM Best A+) Keyport (AM Best A+) North American (AM Best A) And others…

CPS Annuities Website –Product info; Current rates, State Availability –41 Compliance approve client handouts –25 Broker focused training handouts –Lic/Contracting & Application Forms –Real time case status –Carrier strength ratings info - Vital Signs –Client EIA Presentation Work Sheets –Web Training –NEW EIA SECTION !!!

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CPS Annuities Contact Info (800) Pete Buechler CLU, FLMI, AAPA x 148 Dean Walsh AAPA, ACS x 143 Eric Neilsen x 126 Nicole Samson x 123

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