Fixed/Equity Indexed Annuities Copyright 2008

The Wealth Preservation Institute 3260 S. Lakeshore Dr. St. Joseph, MI 49085 269-216-9978 www.thewpi.org

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Introduction • In the past three decades tax deferred annuities have emerged as a commonly used planning tool by financial advisors and estate planning attorneys as well as CPAs/accountants. • The financial services industry has changes its products to appeal to a broader spectrum of the investing public. • Investment risk is very important these days and insurance companies have seen the light and created products to protect our clients money. • The public has become a bit more gun shy with investing in the stock market annuities offer many clients a nice alternative. • NO advisor can give complete financial and estate planning 2 advice without having a working knowledge of annuities.

CDs vs. Fixed annuities • CD returns are taxed annually. • Annuity returns are income tax deferred (using the government’s money for growth). • Fixed annuities typically have higher crediting rates than CDs. • For clients over the age of 55 who have investment money for retirement sitting in CDs for safety, they would be better off in a fixed annuity. 3

Equity vs. Fixed • When are rates going UP??? • I could put my $$$ in CDs. • I could put my $$$ in Fixed Annuities.

CDs 1 Yr CD 1.16% 5 Yr CD 3.5% Taxable gain each year

Traditional Fixed Annuity 3.5%- 4% Tax-Deferred 4

Equity/Fixed Indexed Annuities (EIAs/FIAs) • FIAs are all the rage these days (for good reason). • If you told your clients that if they would be happy with an investment that returned 5-7% a year over the last 10 years with NO downside in the stock market, would they like it? • FIAs are fixed annuities (so there is a minimum guaranteed return) with their growth pegged to the a measuring index (usually the S&P 500). • FIAs are a terrific alternative for clients looking to protect their money from downturns in the stock market while providing good potential for upside growth. • How the growth is calculated varies widely (see the next slides). 5

Caps • Most FIAs have caps. • FIAs give guarantees and for that the client has to live with caps. • For example, an annual point to point annuity might have a cap of 7-8%. If the S&P 500 returns 10% the crediting would only give the client 7-8% depending on the cap. • Some have monthly caps of approximately 3%. 6

Participation Rates • Some FIAs use participation rates to limit the returns. • For example, an FIAs might have NO cap, but 60% participation in the measuring index. • So, if the S&P 500 was up 10%, the client would receive a return of 6%. • Many advisor prefer this method because there is no cap. • It can work well if the participation rate is high enough.

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Changing Caps and Participation Rates • To make things even more complicated, both the caps and participation rates can change. • Some companies guarantee 100% participation but then have their guaranteed cap very low. • Some companies guarantee NO caps but very low participation rates. • The companies always head to make sure that if things don’t go as planned the companies can change the contract (usually annually) to protect their interest. • It is key for anyone who advises clients on these 8 matters to know how the contracts work.

Crediting Methods • Annual point to point – The value of the annuity is captured every 12 months on the anniversary date of the funding of the annuity. – If $100,000 was deposited on Jan. 1, 2005 and the index return is 10% on Jan 1, 2006, the balance would be $110,000. – That gain is locked in and can never be less.

• Point to point buckets – Some companies have 3-5-7-10 years point to point crediting methods. – The money goes up and down with the index without locking until the end of the period. – Most of these have “high water marks” and favorable caps.

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Continued • The high water mark concept comes into play when the annuity does not lock on an annual basis. • If the cap is say 10 years, the market could tank in year 7 and the client would be given a value at the high water mark for protection. • Monthly Point to Point – This is the new one out there that has everyone intrigued. – It is not the easiest to explain, but when tabled out between 1994 and 2004, it would have with one company returned 8.2%

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Two-Tier Annuities (non-walk away) • Simply put, the two-tier annuity has two possible outcomes depending upon how the owner takes distribution at the end of the surrender period, i.e., when the annuity’s term ends. • If a lump sum withdrawal or annuitization of less than a specified number of years is taken, the owner is credited with a lower earning rate than if the proceeds are annuitized for at least the number of years specified in the contract. • Additionally, if the annuity paid a premium or interest rate bonus at the beginning, it will most likely be forfeited unless the proceeds are annuitized for the stipulated minimum number of years. • It is vitally important to disclose whether an annuity is a 11 non-walk away. This will help prevent lawsuits.

How Does Money Grow $100,000 Lump Sum Deposit Year

A

B

1-

+ 15%

+ 5.6%

2-

+ 16%

+ 5.6%

3-

+ 11%

+ 5.6%

4-

- 17%

+ 5.6%

5-

+ 10%

+ 5.6%

6-

-

4%

+ 5.6%

7-

+ 17%

+ 5.6%

8-

-

8%

+ 5.6%

9-

+ 10%

+ 5.6%

10 -

+ 12%

+ 5.6%

Totals

A = $172,089 B = $172,440

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The Three Lane Highway A d v e n t u r e

R i s k

s a f e t y

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Equity Index Annuity • I Will Be Retiring Soon…What next ! • The Stairway to Financial Peace of Mind Year 5

Year 3

Year 1

Deposit

$$$

Year 6

Year 4

Year 2

? − 10% − 20% − 30%

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How Does Money Grow? $100,000

$100,000

Year 1 2 3 4 5

Invested in S&P A 14.71% -22.09% -11.88% -9.10% 21.04%

Invested in FIA B 12% 0 0 0 9%

Total

$86,648.64

$122,080

1999-2003 S&P 500 Performance

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How Does Money Grow? $100,000

$100,000

Invested in S&P

Invested in FIA

A

B

1

$114,710

$112,000

2

$89,370.56

$112,000

3

$78,753.34

$112,000

4

$71,586.78

$112,000

5

$86,648.64

$122,080

Year

ZERO is the HERO

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Tic-Tac-Toe!!!! Upside 2-4%

CD

Security

Potential

FIA

Securities

100% Risk

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If we only knew! How much of your client’s money is principally protected? • 5 year historic review of the S&P 500 • 14.71% (2003) • -22.09% (2002) • -11.88% (2001) • -9.10% (2000) • 21.04% (1999) • The average rate of return over the five year window was -1.45%. • FIAs make good investments in IRAs for those that want to protect from downturns in the 18 market.

Conclusion • ANYONE giving any meaningful financial or estate planning advice must know the basics about annuities. • Even if you have no desire to make money from their sales, by knowing annuities you can keep your clients out of trouble and keep yourself out of trouble by avoiding E&O claims.

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