Alternative to the GLWB Retirement Income Solutions

This presentation contains scenarios with many assumptions on rates of return. No rate of return assumption can predict what may actually happen to a client’s market value. Subject to any applicable Death, Maturity and Guaranteed Minimum Withdrawal Benefit guarantees, any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value. The purpose of the scenarios is to illustrate and compare different investment strategies to generate retirement income.

Retirement Income Principal risks – Longevity – Inflation – Market risk Clients are looking for: – Income for life – Possibility to increase income (growth potential) – Guarantees

Options to address what the client wants. “Bundled” approach Guaranteed Life Withdrawal Benefit (GLWB) “Build-your-own” combination Life annuity + seg fund portfolio Same rules for everybody. Adapt combination to meet each client’s needs. Your clients have a choice!

GLWB Option Combination of life annuity features and seg funds bundled in one product Lifetime income Growth potential through resets every 3 years only. – In order for reset or “step-up” to occur, market value of GLWB portfolio must be higher than the Guaranteed Withdrawal Benefit Base (GWB base). – How likely?

GLWB Option Typically, the guaranteed annual income amount is now 4% of the GWB base if started at age 65, for one individual. Companies offer the GLWB before age 65 but for a reduced income (i.e. 3.5% of the GWB base at age 60). Growth can be achieved through resets every 3 years. Resets are applied if the market value of the investment is higher than the GWB base.

GLWB Option For market value to remain equal to GWB base, net annual rate of return must be equal to the rate of withdrawal – in this case, 4%. If the MER (including the GLWB fee) is 3.0% to 3.5%, this translates into an 7.0% to 7.5% gross annual return necessary to keep market value equal to GWB base. At that rate, market value only remains equal to GWB base: no growth to income.

Build your own Combo Use a life annuity to cover the guaranteed income for life portion (available before age 65 if needed). Possible to add a guarantee period for estate planning purposes. Balance of portfolio invested in one or a mix of seg funds suitable to client’s objectives.

Build your own combo Portfolio Life annuity Guaranteed lifetime income Segregated funds Maximum flexibility to: increase monthly income; make lump sum withdrawal; accumulate for estate.

Scenario A Male turns 65 on Dec. 1 st, Invested premium on Dec. 31 st, 2012: $400,000 Net annual return on seg fund (in GLWB and Combo illustrations): 4.00% GLWB annual income: 4.00% of GWB base = $16,000 ($1, monthly)

GLWB In this scenario: Lifetime monthly income of $1, No increase in income since market value never exceeds GWB base.

Build your own Combo *Interest rate on life annuity: 3.00%. Premium required to generate a lifetime monthly income of $1, for a 65-year-old male. Life Annuity Guarantee Period Premium Life Annuity*Seg Funds No guarantee period$248,591.15$151, year guarantee period$256,643.54$143, year guarantee period$284,330.20$115, year guarantee period$305,570.59$94,429.41

Build your own combo Portfolio $400,000 Life annuity with 20- year guarantee period $284, Guaranteed lifetime income of $1, per month Segregated funds $115, Maximum flexibility to: increase monthly income; make lump sum withdrawal; accumulate for estate.

Build your own Combo In this scenario: Client can increase total income by 2.5% every year until age 97. Client can increase total income by 2.0% every year and have approximately $77,000 left in the seg fund portfolio at age 100.

Age On Jan. 1 st Total Monthly Income GLWB Combo 2.0% increase2.5% increase 65$1, $1,333.33$1,414.94$1, $1,333.33$1,501.55$1, $1,333.33$1,593.45$1, $1,333.33$1,690.98$1, $1,333.33$1,794.49$1, $1,333.33$1,904.32$2, $1,333.33$2,020.88$2, $1,333.33$2,144.58$2, Income Comparison for Scenario Annual net rate of return on seg funds: 4.00%

What happens in the same scenario if the annual rate of return is 6.00%?

Income Comparison for Scenario Annual net rate of return on seg funds: 6.00% Age On Jan. 1 st Total Monthly Income GLWB Combo* 2.5% increase3.0% increase 65$1, $1,419.07$1,435.85$1, $1,509.42$1,546.25$1, $1,605.53$1,665.15$1, $1,707.76$1,793.18$1, $1,816.49$1,931.06$2, $1,932.15$2,079.54$2, $2,055.18$2,239.44$2, $2,186.03$2,411.63$2, *With a 2.5% increase in income, the market value of the seg fund portfolio at age 100 is approximately $257,000. With the 3% increase in income, the market value of the seg fund portfolio at age 100 is approximately $78,000.

What happens in the same scenario if the annual rate of return is 3.00%?

Income Comparison for Scenario Annual rate of return on seg funds: 3.00% Age On Jan. 1 st Total Monthly Income GLWB Combo* 2.0% increase 65$1, $1,333.33$1, $1,333.33$1, $1,333.33$1, $1,333.33$1, $1,333.33$1, $1,333.33$1, $1,333.33$2, $1,333.33$2, *The market value of the seg fund portfolio at age 99 is approximately $3,000.

Let’s assume that the annual rate of return for the first 3 years is 6.00%. For the following years, the rate of return is 3.00%.

GLWB Market value after 3 years is higher than the GWB base. Reset results in higher lifetime guaranteed income: $1, (6.43% higher than initial income amount).

Build your own Combo Client can increase total income by 2.5% every year for the first 3 years to bring monthly income to $1, Withdraw lump-sum ($21,251.90) to buy life annuity.* Both life annuity monthly income total $1, guaranteed for life. Even with the lower return on the seg funds (i.e. 3% annually), client could still increase total income by 2% each year until age 94. *Interest rate on life annuity: 3.00%. Includes 17-year guarantee period to coincide with the end of the guarantee period on the first life annuity.

Income Comparison for Scenario Annual rate of return on seg funds: 6.00% first 3 years; 3.00% following years Age On Jan. 1 st Total Monthly Income GLWB Combo 2.5% increase first 3 years; 2% increase subsequently 65$1, $1,419.07$1, $1,419.07$1, $1,419.07$1, $1,419.07$1, $1,419.07$1, $1,419.07$1, $1,419.07$2, $1,419.07$2,176.27

GLWB “Build-your-own” Combo Guaranteed income for life Yes Increasing income Only if market value is higher than the GWB base amount. Reset available every 3 years only. At the discretion of the client, anytime, for any amount, until no money left in seg funds. Impact on guaranteed lifetime income if excess withdrawal is made YesNo Asset allocation of seg funds In most cases, limits to equity exposure. No restrictions Retirement Income

What about pre-retirement?

GLWB Most contracts offer a bonus (3.5% to 5% of GWB base) for years when no withdrawals are made. The bonus is added to the GWB base, not the market value. Any withdrawals made before the lifetime withdrawal phase will lower the GWB base, thus lowering the eventual lifetime guaranteed income. To benefit from the increase in the GWB base, client must remain in GLWB contract during the lifetime withdrawal phase. If client cancels the GLWB contract, he leaves with the market value, not the GWB base. Resets still apply every 3 years if market value is higher than current GWB base.

Some clients prefer guarantees. Some clients prefer flexibility. What do your clients prefer?

Advantages of building your own combo to generate retirement income Flexibility without affecting guaranteed income from life annuity. – Increase your total income as you wish; – Make lump sum withdrawal if needed (i.e. emergency); – Save for beneficiaries. Maximum flexibility in asset allocation strategy for seg funds.

Carl Victor Sales Manager, Financial Services Assumption Life P.O. Box 160, 770 Main Street Moncton NB E1C 8L1 (506) ext 395