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Understanding Deferred Annuities
Characteristics of Deferred Annuities <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><ul><li>Investme...
Benefits of Deferring Taxes <ul><li>Hypothetical value of $10,000 invested in stocks. This example assumes an investor in ...
There Are Many Annuity Features From Which to Choose <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><...
Assets of Deferred Variable Annuities 1994–2009 <ul><li>Data through September 30, 2009. © 2010 Morningstar. All Rights Re...
Annuity Distributions Can Be Received in a Variety of Ways <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li>...
A Variety of Living-Benefit Options Are Available <ul><li>Each benefit option is subject to additional fees. Violating ter...
Living-Benefit Riders Are Becoming More Common Percent of open variable annuity contracts offering as of December 2009 <ul...
Example of GMAB Illustration of contract offering initial investment value after 10-year contract period <ul><li>This is f...
Example of GMIB Illustration of contract offering 5% compounding and a highest anniversary value <ul><li>This is for illus...
Example of GMWB Illustration of contract offering 5% withdrawal benefit <ul><li>This is for illustrative purposes only and...
Variable Annuity Fees Increase With Features Average expenses for VA contracts with and without living-benefit options <ul...
Investors Are Concerned About Beneficiary Protection Illustration of maximum anniversary value step-up <ul><li>This is for...
Optional Death-Benefit Guarantees Are Available Common variable annuity contract offerings <ul><li>© 2010 Morningstar. All...
Evaluating the Suitability of Deferred Annuities <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><ul><...
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Understanding Deferred Annuities

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Understanding Deferred Annuities

  1. 1. Understanding Deferred Annuities
  2. 2. Characteristics of Deferred Annuities <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><ul><li>Investment savings vehicles typically sold by insurance agents and financial advisors </li></ul><ul><li>Build retirement assets </li></ul><ul><ul><li>Few restrictions on the amount that can be contributed annually </li></ul></ul><ul><ul><li>Tax-deferred accumulation </li></ul></ul><ul><ul><li>Single or flexible payment </li></ul></ul><ul><ul><li>Fixed or variable rate of return </li></ul></ul><ul><li>Choice on how to withdraw money </li></ul><ul><ul><li>Lump sum </li></ul></ul><ul><ul><li>As needed </li></ul></ul><ul><ul><li>Annuitize </li></ul></ul>
  3. 3. Benefits of Deferring Taxes <ul><li>Hypothetical value of $10,000 invested in stocks. This example assumes an investor in the 28% bracket and an 8% annual total return. Estimates are not guaranteed. The illustration does not reflect the different fees and charges associated with variable annuities. If it did, the performance would be lower than cited above. This is for illustrative purposes only and not indicative of any investment. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>0 50 100 150 200 $250k 5 years 10 15 20 25 30 35 40 45 to retirement • Value of taxable account • Value of tax-deferred account
  4. 4. There Are Many Annuity Features From Which to Choose <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><ul><li>Fixed </li></ul><ul><li>Offer guaranteed interest rate for a set period of time </li></ul><ul><li>Variable </li></ul><ul><li>Return and principal value fluctuates </li></ul><ul><li>Investment flexibility </li></ul><ul><ul><li>Choice of investment/asset allocation </li></ul></ul><ul><ul><li>Dollar-cost averaging </li></ul></ul><ul><ul><li>Automatic portfolio rebalancing </li></ul></ul><ul><ul><li>Tax-free transfers between funds </li></ul></ul><ul><li>Living and death benefit options </li></ul>
  5. 5. Assets of Deferred Variable Annuities 1994–2009 <ul><li>Data through September 30, 2009. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>• Variable account assets • Fixed account assets 1,200 1,000 800 600 400 200 0 $1,600 bil 1,400 2006 2005 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 2009 2004 2007 2008
  6. 6. Annuity Distributions Can Be Received in a Variety of Ways <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><ul><li>Payout alternatives </li></ul><ul><li>Lump sum </li></ul><ul><li>Systematic withdrawals </li></ul><ul><li>Annuitization (fixed or variable) </li></ul><ul><ul><li>Single life only </li></ul></ul><ul><ul><li>Single life only with full refund </li></ul></ul><ul><ul><li>Single life only with period certain </li></ul></ul><ul><ul><li>Joint & Survivor </li></ul></ul><ul><ul><li>Joint & Survivor with period certain </li></ul></ul><ul><ul><li>Fixed period </li></ul></ul>
  7. 7. A Variety of Living-Benefit Options Are Available <ul><li>Each benefit option is subject to additional fees. Violating terms and conditions of the contract may void guarantees. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><ul><li>Guarantees initial investment </li></ul><ul><li>(or some multiple) after a </li></ul><ul><li>specific number of years </li></ul>Description Target age Other details <ul><li>Guarantees a fixed floor of </li></ul><ul><li>income after a specified period </li></ul><ul><li>once contract is annuitized </li></ul><ul><li>Guarantees a return of </li></ul><ul><li>principal over time through </li></ul><ul><li>systematic withdrawals </li></ul><ul><li>5–10 years before, and </li></ul><ul><li>during, retirement </li></ul><ul><li>5–10 years before retirement </li></ul><ul><li>10–20 years before retirement </li></ul><ul><li>Available only during savings </li></ul><ul><li>and investment phase </li></ul><ul><li>Investment restrictions may </li></ul><ul><li>apply </li></ul><ul><li>Must annuitize to receive </li></ul><ul><li>benefit </li></ul><ul><li>Income for life </li></ul><ul><li>Payout factors are lower </li></ul><ul><li>than those used to annuitize </li></ul><ul><li>actual account value </li></ul><ul><li>Investment restrictions may </li></ul><ul><li>apply </li></ul><ul><li>Maximum withdrawal amounts </li></ul><ul><li>vary by contract </li></ul><ul><li>Annuitization not required </li></ul><ul><li>Single and joint lifetime </li></ul><ul><li>withdrawals are available </li></ul><ul><li>Often able to step up guarantee </li></ul><ul><li>amount if market performs well </li></ul><ul><li>Investment restrictions may </li></ul><ul><li>apply </li></ul>Living-benefit option Guaranteed minimum accumulation benefit (GMAB) Guaranteed minimum income benefit (GMIB) Guaranteed minimum withdrawal benefit (GMWB)
  8. 8. Living-Benefit Riders Are Becoming More Common Percent of open variable annuity contracts offering as of December 2009 <ul><li>This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Past performance is no guarantee of future results. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>35% 29% 64% 70% 50 40 30 20 10 0 GMAB GMIB GMWB 60
  9. 9. Example of GMAB Illustration of contract offering initial investment value after 10-year contract period <ul><li>This is for illustrative purposes only and not indicative of any investment. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>$130k 120 110 100 90 80 70 10 9 8 Years to retirement 7 6 5 4 3 2 1 0 If contract value falls below initial value, the benefit will bring contract value back up. • Initial purchase amount • Hypothetical contract value
  10. 10. Example of GMIB Illustration of contract offering 5% compounding and a highest anniversary value <ul><li>This is for illustrative purposes only and not indicative of any investment. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>10 9 8 7 6 5 4 3 2 1 Retirement Must annuitize to receive benefit. Receive the value that provides the greatest income stream. Years to retirement • Hypothetical contract value • 5% compound annual growth • Highest anniversary value
  11. 11. Example of GMWB Illustration of contract offering 5% withdrawal benefit <ul><li>This is for illustrative purposes only and not indicative of any investment. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>$120k 100 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Years in retirement • Hypothetical contract value • Cumulative withdrawals • Annual withdrawals
  12. 12. Variable Annuity Fees Increase With Features Average expenses for VA contracts with and without living-benefit options <ul><li>This is for illustrative purposes only and not indicative of any investment. Past performance is no guarantee of future results. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>2.5% 2.0 1.5 1.0 0.5 0.0 No living-benefit riders With living-benefit riders • Average MEA & distribution charges • Average expense ratio 1.24% 2.18% 1.41% 2.47%
  13. 13. Investors Are Concerned About Beneficiary Protection Illustration of maximum anniversary value step-up <ul><li>This is for illustrative purposes only and not indicative of any investment. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>3 4 2 Year 1 5 6 • Current value • GMDB annual step-up • Anniversary mark • Initial investment
  14. 14. Optional Death-Benefit Guarantees Are Available Common variable annuity contract offerings <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><ul><li>Maximum anniversary value (MAV) Looks back at account value on anniversaries and guarantees at least as much as the highest value upon death </li></ul><ul><li>Rising floor Sets a minimum death benefit value by compounding net premiums at a fixed annual rate of return </li></ul><ul><li>Earnings enhancement bonus Adds a fixed percentage payment to contract value at death, generally 40% under age 75 and 25% over age 75, although ages and percentages can vary </li></ul>
  15. 15. Evaluating the Suitability of Deferred Annuities <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><ul><li>Annuities can be complex, so it is important to gain an understanding of the following: </li></ul><ul><ul><li>Types </li></ul></ul><ul><ul><li>Features </li></ul></ul><ul><ul><li>Options/Riders </li></ul></ul><ul><ul><li>Fees associated with purchasing the insurance protection </li></ul></ul>

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