1. Understanding Fixed Index Annuities

2. Agenda Why FIAs How They Work Understanding the Annuity Owner
Prospecting

3. Why FIAs Individuals Must Fund Their Retirement
Decline in Defined Benefit Plans
Social Security Uncertainty
Increase in Defined Contribution Plans
Individual generally must select
Individual must choose investments
Income based on performance
Deferred Annuities have become a “Go To” Retirement Savings Vehicle

4. Why FIAs Annuities Offer Retirement Planning Benefits
Tax deferred growth
Various types of guarantees
Can derive an income guaranteed for life*
The original categories of Deferred Annuities:
Fixed
Variable
* If a life contingent option is chosen

5. Why FIAs Fixed Annuities Variable Annuities Fixed Rate of Return
Set by Company
Guaranteed Minimum Rate
Guarantee of Principal
Subject to surrender charges
Subject to Inflation Risk
Variable Annuities
Return based on Performance of Subaccounts
May have a fixed account
May have a guarantee against loss in the event of death
Can address Inflation Risk
Subject to Market Risk – No Principal Guarantee

6. Why FIAs
FIAs are a combination of many of the desired features or both Fixed and Variable Annuities:
Growth Based on the Performance of an Index
Protection from Market Losses
Guarantee of Principal
May be subject to surrender charges
Locked in Interest Earnings at Various Points in Time
Provide a Hedge Against Inflation

7. How FIAs Work Definitions Crediting Strategies FIA Riders
Liquidity Options
Bonuses
Fees and Expenses

8. How FIAs Work Definitions: Market Index Indexing Method Index Term
Participation Rate
Cap Rate
Spread Rate (Margin Rate)
Floor
Uncapped Strategy

9. Definition: Market Index
An index that measures the price changes of a large, overall market, such as the S&P 500.

10. Definition: Indexing Method
The calculation applied to the change in the index to determine the interest crediting rate applied to the annuity. Dividends are excluded.
Examples:
A Point to Point
Monthly Sum
Monthly or Daily Averaging
Annual Reset (Ratchet)
High Water Mark

11. Definition: Index Term
The period over which index change is measured and the index-linked interest is calculated and credited to the annuity.

12. Definition: Participation Rate
The participation rate determines how much of the increase in the index will be credited to the annuity. It is expressed as a percentage – for example 60%. If the increase in the index is 10%, 6% will be credited.

13. Definition: Cap Rate
The Cap Rate is the maximum amount of interest the annuity can earn.
Example:
Change in Index = 10%
Participation Rate = 60%
Cap Rate = 5%
Amount credited to the annuity = 5%

14. Definition: Spread Rate
The Spread or Margin rate is an amount of interest that is subtracted from the change in Index. This fee may also be called an administrative fee and can be used separately or in conjunction to a cap or participation rate.
Example:
Change in Index = 10%
Spread = 2%
Amount Credited to the Annuity: 8%

15. Definition: Floor
A contract may provide a floor. This is the minimum guaranteed interest rate that will be credited to the annuity. The floor is based on the claims paying ability of the issuing insurance company.

16. Definition: Uncapped Strategy
This is a new type of strategy where there is no cap on the change in index rate paid. Often to participate in this type of strategy, the insurance company will require a specified amount to be invested in a fixed account.

17. How FIAs Work: Crediting Strategies
Point to Point
Monthly Sum
Monthly or Daily Averaging
Annual Reset (Ratchet)
High Water Mark

18. Strategy: Point to Point
The change in the index is calculated from two points in time. Any change is impacted by any participation, cap or spread rate. The change is then credited to the annuity at the end of the crediting period and sets a new value for the annuity.
Can be an Annual Point to Point or a Term End Point.
A Term End Point is the same as an Annual Point to Point with the interest change credited after the end of a certain term typically 3 – 10 years.

19. Example: Point to Point

20. Strategy: Monthly Sum
The change in the index is calculated each month and both positive (impacted by participation rate, cap rate or spread rate) and negative changes (not reduced by cap rate) are added up at the end of the term. If the sum is positive, it will be credited to the annuity at the end of the term. If the change is negative, no interest is credited, but the annuity value is not reduced.

21. Example: Monthly Sum

22. Strategy: Monthly or Daily Averaging
The value of the index is recorded on a daily or monthly basis, and the index-linked interest is calculated as the difference between the average of the daily or monthly values over the course of the term and the index value at the start of the term, subject to participation rate, cap rate and or spread rate.

23. Example: Monthly or Daily Averaging

24. Strategy: High Water Mark
The index value is recorded at various times over the course of the term (usually on annual anniversaries). Interest is then based on the difference between the highest index value and the index value at the start of the term. Interest is credited at the end of the term.

25. Example High Watermark

26. FIA Riders Death Benefit Long Term Care
Guaranteed Lifetime Withdrawal Benefit

27. Riders: Death Benefit Basic – Pays full account value at death
Enhanced
Annual Increase – Guarantees death benefit grows by a specified percentage each year regardless of performance
May combine an income stream with Annual Increase

28. Riders: Long Term Care
Provides the flexibility of having access to a portion of the annuity’s principal to pay for long term care expenses without any applicable surrender charges.

29. Riders: Guaranteed Lifetime Withdrawal Benefit
Provides an annual withdrawal throughout the owner’s lifetime, without the need to annuitize the contract
Payments continue even if account value decreases or is zero

30. Liquidity Options Withdrawals Lump Sum Distributions Free Withdrawal
May offer a percentage that can be withdrawn without incurring any surrender charges
Systematic Withdrawals
Provides a specified amount at regular intervals until the account value is exhausted
Lump Sum Distributions
For non-qualified contracts, interest will come out first, subject to ordinary income and potentially a 10% penalty.

31. Liquidity: Annuitization
Annuitization: A systematic liquidation of principal and interest.
Life Only
Life and Period Certain
Life and Refund
Joint Life Options
Period Certain

32. Annuitization: Life Only
Payments are made as long as the annuitant is alive. At death payments cease. No guarantees. Pays the highest income amount.

33. Annuitization: Life and Period Certain
Payments will be made for a specified time or for the annuitant’s lifetime, whichever is longer. If the annuitant dies prior to the specified time person, payments will continue to a designated beneficiary until the specified period is over.

34. Annuitization: Life and Refund
Payments will be made for the life of the annuitant. If the annuitant dies before the original premium has been paid out, the balance will be paid to a designated beneficiary. Can be lump sum (“Cash Refund”) or installments depending on the contract options.

35. Annuitization: Joint Life
Payments will be calculated and made over 2 lives. The amount paid to the survivor may be 100% , 67% or 50%. May also add a guarantee such as period certain or refund if contract offers.

36. Annuitization: Period Certain
Will pay the entire amount of the contract over a set period of time regardless of whether or not the annuitant lives to the end of the term. If the annuitant dies prior to the end of the term, the balance of payments will be made to a designated beneficiary.

37. Bonuses
Premium
Guaranteed Lifetime Withdrawal Benefit
Annuitization

38. Bonuses: Premium
A percentage of premiums paid is credited to the annuity at issue. There may be a higher or longer surrender charge or higher fees to offset the cost of providing the credit.

39. Bonuses: GLWB
If the Guaranteed Lifetime Withdrawal Benefit is utilized, an additional percentage is added to the base from which withdrawals are taken

40. Bonuses: Annuitization
Similar to the GLWB bonus, if the contract is annuitized, an additional percentage is added to the contract from which the annuitization is calculated.

41. Fees and Expenses Surrender Charges Market Value Adjustment
Optional Benefit Charges
Margin, Spread or Administrative Fee
Maintenance Fee

42. Fees: Surrender Charges
A percentage charge against premiums (or value of the annuity) in the event that the contract or a portion of the contract is surrendered prior to the end of the surrender charge period. Oftentimes there is a free withdrawal amount that can be accessed without the charge. In general the percentage of surrender charge declines over time.
Note: The surrender charge and free withdrawal is a contract based charge. Taxes may still apply to the extent that the withdrawal is included in gross income.

43. Fees: Market Value Adjustment
An adjustment to the surrender charge. May be positive or negative depending on prevailing rates at the time of surrender. In general, if interest rates are lower at the time of surrender, the surrender charge may be reduced, if interest rates are higher at the time of surrender, the surrender charge may be increased.

44. Fees: Optional Benefit Charges
In general, if additional benefits are added to the contract, a additional fee may be charged to offset the cost of providing the rider by the insurance company

45. Fees: Margin, Spread, Administrative
The Spread or Margin rate is an amount of interest that is subtracted from the change in Index. The key difference between a Spread and other types of fees is that a Spread is not charged to a policy if there is not enough crediting performance in the contract to cover the cost of the spread. A Spread may also be called an “Administrative Fee” and can be used separately or in conjunction to a cap or participation rate.

46. Fees: Maintenance
May also be called a contract fee. Generally a small annual dollar amount. ($25 etc.)

47. Parties to the Contract
Owner
Annuitant
Beneficiary
Insurance Company

48. Party: Owner
The owner is the “boss” of the annuity. They make all the decisions involving the annuity such as how to how much to invest, what index to choose, if there will be any riders. The owner also decides who the annuitant and beneficiary will be.

49. Party: Annuitant
The annuitant is the measuring life in the annuity. It is on the annuitant’s life that will annuity payments will be based. The owner and annuitant may be the same person or they may be different individuals.

50. Party: Beneficiary
The beneficiary is the individual who has the right to receive the proceeds of the contract in the event of the death of the owner or annuitant. Once annuity payments begin, if the annuitant dies, if there is any post death payment to be made (based on the annuity option chosen), the beneficiary will receive that payment.

51. Party: Insurance Company
The insurance company is the party that issues the contract and is responsible for the guarantees in the contract. The strength of the guarantees are only as strong as the financial strength and claims paying ability of that issuing insurance company.

52. FIA: Advantages
Provides the opportunity to follow a market index while at the same time providing a minimum guaranteed interest rate
Earnings generally grow tax deferred as long as they remain in the annuity
An annuity can provide an income you cannot outlive (Provided a life income annuitization option is chosen)
Non-qualified annuities have no contribution limitation, or required minimum distribution requirements*
If the owner or annuitant dies while the annuity contract is in force and it has value, that value will pass to a designated beneficiary outside of probate
In most states, an annuity avoids creditor claims
* Contract terms may designate a maturity or annuitization date.

53. FIAs: Disadvantages
Non-qualified annuity premiums are not tax-deductible
Withdrawals prior to age 59 ½ may be subject to a 10% penalty in addition to ordinary income
The annuity may have a surrender charge in the beginning years of the contract
There is a risk of losing money if the issuing insurance company does not guarantee 100% of principal
In general, once annuitization has begun, the income option cannot be changed

54. Who Buys FIAs Has a long term retirement savings or income objective
Adverse to Risk
Understands the opportunity for growth by following a market index
Understands that the guarantees are only as good as the issuing insurance company
Prefers to delegate decisions to others
CD and Fixed Annuity retirement savers

55. Who Buys FIAs Average age at first purchase: 51
Current average age of annuity owners: 70
Gender: 51% female
65% of owners are retired
Reasons for purchase:
Safety
Tax Deferral
Guarantees
Increase in positive sentiment towards annuities
* 2013 Survey of Owners of Individual Annuity Contracts, conducted by The Gallup Organization and Matthew Greenwald & Associates for the Committee of Annuity Insurers

56. Who Buys FIAs Uses: Retirement
As a financial cushion in the event they outlive their retirement savings
As a resource to avoid being a burden on the children
As financial protection for investments
As an emergency fund in the event of catastrophic illness or long term care
 * 2013 Survey of Owners of Individual Annuity Contracts, conducted by The Gallup Organization and Matthew Greenwald & Associates for the Committee of Annuity Insurers

57. FIA Openers Are you confident you will have enough money to retire on?
Will retirement change your lifestyle?
When is the last time you reviewed your retirement income plan?
Have you lost any money in the market lately?
Are you happy with the return you are receiving on your CD, Fixed Annuity?

58. Sources
2013 Survey of Owners of Individual Annuity Contracts, Conducted by the Gallup Organization and Matt Greenwald & Associates for The Committee of Annuity Insurers
Understanding Fixed Index Annuities, Allianz Life Insurance Company of America 3/2016
Fixed Annuity Basics, Genworth Financial 7/31/12
Understanding Index Annuities, Morgan Stanley 2013
The Benefits of a Fixed Index Annuity, North American Company for Life and Health Insurance 2/17
Fact Sheet for Consumers: Understanding Fixed Indexed Annuities, Insured Retirement Institute 12/15/2014
Understanding Annuities: A Lesson in Indexed Annuities, VSA, LP 8-13
A Buyers Guide for Deferred Annuities, NAIC 2013
–Values Calculation Example