© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC The Value of Annuities Retirement Savings to Last a Lifetime Texas Department of Insurance January 21, 2010

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Agenda  Why an Annuity and Why Now?  Annuity Basics  How Annuities are Sold  Consumer Protections

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Why an Annuity and Why Now? Retirement Mountain  Accumulate – Determining how much you will need and how to achieve retirement savings goals.  Consume – Managing your retirement assets to last a lifetime. ACCUMULATE CONSUME

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Americans are Living Longer  At age 65, the average life expectancy for men is 82 and for women it’s 85.  20% of males and 30% of females will live past age 90.  Medical advances continue to increase life expectancy. Source: Society of Actuaries, “Understanding and Managing the Risks of Retirement”, Why an Annuity and Why Now?

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Fewer Workers have Traditional Pensions  The majority of retirement savings plans have shifted to individually managed defined contribution (DC) plans.  Only 20% of workers have defined benefit plan, while 66% have a 401(k).  Many DC plans offer lump sum payouts that workers must self-manage for retirement. Why an Annuity and Why Now?

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC  In 2009, only 13% of workers were very confident about having enough for a comfortable retirement.  Conversely, 22% are not at all confident they have saved enough for a comfortable retirement.  Workers nearing or in retirement had to drastically rethink their retirement plans due to the economic crisis. Why an Annuity and Why Now? Source: Employee Benefit Research Institute, “2009 Retirement Confidence Survey”, 2009 Americans Recognize Retirement Security Challenges

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Why an Annuity and Why Now? The recent economic crisis highlighted and enhanced the long-term value and guarantees of annuities.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC An annuity:  is an insurance contract.  helps you amass money for retirement and converts those savings into income you cannot outlive.  is a retirement savings vehicle, not a short-term financial product.  can complements 401(k)s and IRAs.  assists those without access to workplace retirement plans. Annuity Basics What is an Annuity?

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics Buyer profile Annuity owners are middle-income.  80% have annual household incomes below $100K; 42% below $50K. Majority of owners are women.  58% women vs. 42% men. Safe & Secure Way to Save.  79% say secure and safe way to save. Source: 2009 Survey of Owners of Non-Qualified Annuity Contracts, conducted by the Gallup Organization and Mathew Greenwald & Associates

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Two Basic Types of Annuities  Deferred annuity  Immediate annuity Annuity Basics Types

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Deferred Annuity  Accumulates savings and converts those savings into guaranteed lifetime income.  Accounted for 94.9% of annuity considerations in  Can be paid for with a single premium (payment) or multiple premiums.  Premiums can be fixed or flexible. Annuity Basics Types

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Deferred Annuity  Accumulation phase  Earnings build free of current federal income taxes.  Once a withdrawal is made or payouts begin, earnings are taxed at ordinary income rates. Annuity Basics Types

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Deferred Annuity  Payout phase  You choose how and how often to receive payments.  Options for spouse and beneficiaries. Annuity Basics Types

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics Types Immediate Annuity  Converts a lump sum into guaranteed lifetime payments.  Similar to traditional pension.  Purchase with money from sale of home/business, life insurance proceeds, or other savings.  Can convert money from 401(k)/IRA to immediate annuity.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics How will the value of my annuity grow?

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics How will the value of my annuity grow? Fixed Annuity  Money earns interest at a guaranteed rate.  Savings grow for a specific period of time.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics How will the value of my annuity grow? Index Annuity  Earnings accumulate at formula linked to an equity-based index (e.g. S&P 500).

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics How will the value of my annuity grow? Variable Annuity  Earnings based on the performance of money placed in subaccounts invested in stocks and bonds, or a fixed rate account.  Returns subject to market fluctuation.  Additional riders available to guarantee minimum returns (payouts) and guaranteed minimum policy value at death.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics What are my income (payout) options?  You choose how and when you will receive income.  No requirement to begin withdrawals at age 70 ½.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics What are my income (payout) options? Guaranteed Income for Life (Annuitization)  Life – Guarantees income as long as you live.  Joint and Survivor Life – Guarantees income as long as you or your joint annuitant live.  Additional Options – e.g. life income with period certain or life income with refund.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics What are my income (payout) options? Guaranteed Living Benefits  Guaranteed Minimum Income – Ensures minimum lifetime payouts regardless of market performance.  Guaranteed Minimum Accumulation – Ensures annuity value is at least equal to a minimum amount after a period of time.  Guaranteed Minimum Withdrawal for Life – Ensures minimum growth value, regardless of market performance. Ensures withdrawals of a set percentage of a designated protected value for life.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics What are my income (payout) options? Options Without Lifetime Income  Period certain – a series of payouts for a specified number of years.  Lump sum payout.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics What if I need access to my money now?  Withdrawal and surrender charges apply for early withdrawals.  Charges decrease with each passing year.  No charges after surrender period ends.  Most annuities allow for a penalty-free 10% withdrawal each year until payouts begin or surrender period ends.  No-charge withdrawals may be available for nursing home costs or a terminal illness.  Tax penalties apply for additional early withdrawals.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics What if I need access to my money now? Surrender Charges Decrease Over Time This chart represents the surrender fee schedule for a fixed, single- premium deferred annuity with an 8 year surrender period.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics What is the maximum annuitization date?  All annuities have a date at which time you need to annuitize the policy.  Has been incorrectly called a maturity date.  Does not restrict when you can cancel your annuity, take withdrawals, or annuitize.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics What happens when I die?  Before payouts start  Beneficiary receives full amount of annuity.  Minimum death benefit (for variable annuities) may apply.  After payouts start – depending on the type of payout chosen, the beneficiary receives remaining value of annuity.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC Annuity Basics What if I made the wrong choice and change my mind? “Free look” period.  Depending on state requirement, consumers receive a full refund of the premium (fixed annuity) or the market value (variable).  Interstate Compact Standard: 10 days.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC How Annuities are Sold Where can I buy an annuity?  Only life insurers issue annuities.  Distributed/sold through various channels.  All sellers must be licensed to sell insurance.  Variable annuity sellers must be additionally licensed by FINRA.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC How Annuities are Sold Where can I buy an annuity? Career Agent  Career agents may sometimes sell multiple insurers’ annuities.  Captive agents only sell annuities from one company.  Insurer contracts with, supervises, and compensates agent.  Agent performs suitability analysis, makes recommendation, submits application to insurer.  Insurer performs suitability review of sales.

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC How Annuities are Sold Where can I buy an annuity? Independent Agency  Offers multiple insurers’ annuities.  Agent performs suitability analysis, makes recommendation, submits application to insurer.  Insurer issues annuity.  Independent agency or insurer performs suitability review of sales. Examples: AMZ, Financial Brokers Int’l

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC How Annuities are Sold Where can I buy an annuity? Bank  Insurer contracts with bank insurance agency.  Bank representative performs suitability analysis.  Bank submits application to insurer.  Bank or insurer performs suitability review of sales. Examples: Chase, PNC

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC How Annuities are Sold Where can I buy an annuity? Wirehouses, Regional and Independent Broker/Dealers  Offers multiple insurers’ annuities.  Wirehouse performs suitability analysis.  Wirehouse submits application to insurer.  Wirehouse or insurer performs suitability review of sales. Examples: Merrill Lynch, Morgan Stanley

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC How Annuities are Sold Where can I buy an annuity? Broker/Dealer  B/D licensed to sell variable annuities.  Offers multiple insurers’ annuities.  Registered representative performs suitability analysis.  B/D performs suitability review.  B/D submits application to insurer.  All variable annuity sales, regardless of distribution method, are through B/Ds. Examples: Raymond James, A.G. Edwards

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC How Consumers are Protected Who regulates the annuity market?  State insurance departments  SEC (variable annuities)  FINRA (variable annuity sellers)

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC How Consumers are Protected Who regulates the annuity market? NAIC Model Regulations  Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities  Suitability in Annuity Transactions  Annuity Disclosure

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC How Consumers are Protected Who regulates the annuity market? NAIC Model Regulations in Texas Adopted:  Certifications/Designations Model  Suitability Model Pending:  Disclosure Model

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC How Consumers are Protected Who regulates the annuity market? Texas Consumer Protection Laws  Replacement of Annuities  Non-forfeiture for Individual Deferred Annuities  Standard of Conduct for Licensed Agents  Additional protections

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC How Consumers are Protected Who regulates the annuity market? Federal Role  SEC – monitors companies selling variable annuities  FINRA – licenses and monitors broker/dealers selling variable annuities

© AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC The Value of Annuities Questions?