Income Strategies with Annuities

The environment for annuities Systematic withdrawal Annuitization Income hybrids of the future Agenda

The Environment

The avoidance of taxes is the only intellectual pursuit that still carries any reward. –John Maynard Keynes (1883–1946)

THE IRS

Annuity sales rising Increased popularity of variable products Exploitation of annuity “pitfalls” Investor concerns Current Environment

People are living longer Doubts about Social Security Pension plans are less common Costs are rising Markets don’t grow to the sky A Dose of Reality

Financial asset values have risen at rapid rates Need for more efficient income and wealth transfer Fund and stock assets seen as better wealth- transfer vehicles Invincible or Vulnerable?

The focus has been on accumulation

The focus should be on income

Inflation Health care issues Unexpected expenses Outliving the income stream Income Concerns

Systematic withdrawals Bonds CDs Money markets Annuities Income Tools

Structuring Income Capital Assets Annuities Qualified Assets Intended for financial advisers only.

Annuities are meant to be spent!

Systematic withdrawals from annuities Systematic withdrawals from annuities

Flexibility Perceived liquidity Remaining value appears each month on client statement Assets stay on adviser’s book Systematic Withdrawal Advantages

No apparent tax benefits No income guarantees Over-aggressive increases in income could deplete principal Potential of outliving your income Limitations Systematic Withdrawal

The method of choice for annuity income Systematic Withdrawal

The “A” Word

Annuitization

Income never changes You cannot stop or adjust it Insurance company keeps the money at death “Dead” money on adviser’s books Perception or Reality?

Tax-advantaged withdrawals Income a client cannot outlive Client “customization” of their income stream Fixed or variable payments Annuitization Advantages

Difficult to understand Loss of control Loss of liquidity Statements are replaced by checks Adviser discomfort Annuitization Limitations

Insurance Company Guarantees Income

Single-life options Joint-life options Non-life options Annuitization

Single life only Single life with period certain Single life with refund feature Single-Life Options Annuitization

Joint life only Joint life with period certain Joint life with reduced payment to survivor Joint life with “pop-up” provision Joint-Life Options Annuitization

Designated period certain Designated amount –Fixed payout only 3 to 30 years Non-Life Options Annuitization

Fixed, variable or combination Monthly, quarterly, semi-annual or annual payments Made by check or electronic funds transfer (EFT) Flexibility Annuitization

Male, age 70 Single-life only option and 10 years period certain American Legacy Growth-Income Fund $200,000 account value and cost basis Case Study #1

American Legacy III Growth-Income Fund Historical Variable Payout $200,000 cost basis with variable annuitization payments beginning 03/84 $5,578 $1,292 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 03/8403/8503/8603/8703/8803/8903/9003/9103/9203/9303/9403/9503/9603/9703/9803/9903/0003/0103/02 Date Monthly Benefit Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

Tax Efficiency Cumulative Tax Excludable Cumulative Income Tax Excludable Monthly Income Date Mar ’84$1,292 $927$1,292 $927 Mar ’89$2,153 $927$112,870 $56,551 Mar ’94$2,903 $927$268,367 $112,176 Mar ‘02$5,578 $0$713,890 $200,000 Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

Female, age 65 Concerns: –Spending assets efficiently –Not outliving income –Leaving something to heirs Case Study #2

Jan ’97$2,129$2,129$427,909 Jan ’99$2,846$62,690$503,723 Jan ’00$3,005$98,327$495,883 Jan ’02$3,000$170,721$423,009 A Story of Growing Income Value of Unit Refund Cumulative Income Monthly Income Date $200,000 invested in 1987in American Legacy Growth-Income Fund. Systematic withdrawals begin Account value is $430,038 in January 1997 when annuitization life with refund option payments begin. Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

Husband and wife, age 60 Newly retired, no pension plan, rollover assets $200,000 joint with pop-up, American Legacy Growth-Income Fund Concerns: –Outliving income Case Study #3

Joint and survivor with pop-up provision Mar ‘84$9,908$9,908 Mar ‘89$16,439$16,439 Mar ‘94$22,121$26,926 Mar ‘95$22,497$27,384 Mar ‘02$41,375$50,361 Annual Income with Pop-up Annual IncomeYear $200,000 American Legacy Growth-Income Fund. Annuitization begins in 3/84. Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

Income Hybrids

New enhancements and product innovations in development Geared for annuity owners needing more income flexibility Combines the best features of annuity-income alternatives Income Hybrids

Tax-advantaged withdrawals Payments guaranteed for life Increased liquidity and flexibility Access to additional cash Monthly statement reporting and daily account values The Benefits

Automatic portfolio re-balancing Ongoing re-allocation of assets Dollar cost averaging* Performance reporting Assets under management *This investment method involves continuous investment in securities and does not guarantee a profit. Investors should consider their financial ability to continue purchasing through all price levels. The Benefits

Male, age 60 Concerns: –Wants to spend assets efficiently –Access to additional income –Keeping pace with inflation and participating in market performance Case Study #4

1984 $0$10, $0 $18, $50,000 $15, $0 $14, $0 $15, $0 $34,052 Customized Income Solution Avg. Annual Income Withdrawal Year $200,000 American Legacy Growth-Income Fund. Annuitization begins 4/84. Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

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Summary Annuities are meant to be spent!

What should you do? Talk to your clients Explore their income needs and wealth-transfer concerns Consider the many ways annuities can help them meet those needs

American Legacy III Growth-Income Fund 10 years5 years12 months %+11.38% +5.82% Average annual compound returns through March 31, 2002, with all distributions reinvested Results reflect payment of the appropriate contingent deferred sales charge (CDSC), which starts at 6% for the first two years and declines to 0% after the seventh year.The CDSC is waived for certain withdrawals as described in the prospectus. Results also reflect deduction of all fund and contract expenses, including a 0.25% distribution fee, a 0.10% administrative fee and a 1.30% mortality and expense risk charge, which includes the 0.15% charge for the optional enhanced guarantee minimum death benefit (EGMDB), If the EGMDB was not in effect, the results would be higher. Figures shown are past results and are not predictive of future results. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity. Unit price and return will vary, so investors may lose money.

This presentation is intended for financial advisers. Investors seeking more information about any of the American Legacy variable annuities or American Funds Insurance Series, including risks, charges and expenses, should obtain the applicable prospectuses from their financial adviser and read them carefully before investing or sending money. If income results are presented, this presentation is authorized for use with prospective investors only when preceded or accompanied by the current prospectus for the fund(s) being offered. If investment results are presented, this presentation must be accompanied by the most recent American Funds Group and American Legacy Variable Annuities Quarterly Statistical Update. All results reflect appropriate charges and expenses for American Legacy III. Securities offered through and annuities issued by The Lincoln National Life Insurance Company, Fort Wayne, IN.