Equity Index Annuities

Annuity Marketing

CPS INSURANCE SERVICES

For Agent use only/Not for use with the general public

Agenda 5/24/06Webinar Duration 35-45 Mins

• What is an EIA• Typical Client• Types of EIA’s• Minimum Guarantees• Growth Adjusting Factors• Examples:

– Annual Reset Point to Point– Annual Reset w/ Monthly Average– Annual Reset w/ Performance Trigger– Annual Reset w/ Monthly Pt to Pt

• Regulatory Environment• Client Handouts• Questions

What is an Equity Indexed Annuity (EIA)

• Fixed Annuity- Guarantee of Principal

• Benefits linked to an external equity reference or an equity index (Typically S&P 500). YOUR CLIENT IS NOT DIRECTLY PARTICIPATING IN THE MARKET

• Can be Immediate or Deferred– Deferred- (Most Common) Monies allowed to

accumulate tax deferred– Immediate- Income payments (Annuitization) to

begin within 1 year of issue

Typical Client

• Wants guarantee of principal

• Is dissatisfied with fixed returns

• Can sustain year(s) with little or no account growth

• Does not need systematic withdrawals

• Does not need to access funds until age 59.5

• Can understand somewhat complex product designs

Types of EIA’s• Annual Reset/Ratchet Point to Point • Annual Reset/Ratchet w/ Monthly Average• Annual Reset/Ratchet Performance Trigger

Account • Annual Reset/Ratchet w/ Monthly Point to Point• Annual Reset/Ratchet w/ Daily Average• Contract Term Point to Point • High Water Mark

and more…

Definitions• Premium- Premium deposits can be Single (one time

only) or Flexible (ongoing)– If flexible do they reset surrender charges?

• Accumulated Value (AV)- Premium and any credited index measured growth

• Surrender Value- AV less any surrender charges• Policy Anniversary- Date of policy issue. • Index Anniversary- Date Index values are measured.

(if this date falls on a non-trading day, carrier will measure the previous or following trading day) note: Index Anniv and Pol Anniv may be 2 different dates

Minimum Guarantees• Can be applied to Premium (Prem) or Accumulated Value

(AV)• Premium Guarantee – Most common, Compound your

premium (or % of) at set rate and compare to Accum Value, client gets the higher value. (2 lines of money)

E.g… 90% of premium at 3%– 100K prem, 10yr contract - 90K @ 3% for 10yrs =

$120,952 or 1.92% AEY • Accum Value Guar- If credited index earnings are not at least

as high as set min. then entire AV is credited min. guarantee (1 line of money)

Index growth adjusting factors• Participation Rate (PR)-Specifies the % increase in the index

growth that you will “participate” in.

• Spread- AKA:Margin, Fee - Subtracted from index growth before earnings are credited.

• Cap Rate- (Cap) 2 types- – INTEREST CAP-Caps the max. amount of interest you can

earn after application of adjusting factors (PR, and spread). – INDEX CAP- Caps Index growth before applying adjusting

factors

• Performance Trigger Account Credited Interest- Specified interest rate credited to account as long as index does not decline

• Adjusting Factors can change on policy anniversary typically and are subject to min/max

Annual Reset/Ratchet Point to Point

• Most Popular Design• Easiest to understand / explain• Compares the index starting value on the

policy’s index start date to index ending value on the index anniversary.(Index Anniv and Pol Anniv may be 2 different dates)

• Apply adjusting factors i.e.. PR, CAP, Spread• Earnings are locked in and cannot be taken

away (Ratcheted)

Annual Reset/Ratchet Pt to Pt 100K prem, 100% PR, 6.00% earnings cap, No

spread. Min Guar = 2% on 100% of AV (Lafayette Life Marquis Advant-Edge)

Year 1

– 1st year index start date 1/15/05 index value = 900 1st year Index Anniv 1/15/06 index = 980

– 980-900=80 pt increase; 80/900= 8.89% index growth

– Apply 100% PR=8.89% then cap at 6.00%.– You earn 6.00% for this contract yr. – AV @ end of yr 1 = $106,000

Year 2

• Beginning of year 2 AV= $106,000

• Year 2 Index start date 1/15/06, value = 980

• Compare to 1/15/07 index value = 970– 970-980= -10 (Negative year but no reduction to

AV due to ratcheting)

• Minimum Growth Guaranteed– 2% on 100% of AV = 2% on $106,000 = 108,120

End of Yr 2 AV = 108,120 (1 line of money)

Bi-Annual Reset/Ratchet point to point

• Similar design as Annual Reset/Ratchet with the difference being that it compares index growth over 2 years

• Will have higher caps & PR, lower spreads

• Risk of having 2 years pass with no AV growth

Annual Reset/Ratchet with Monthly Average

• Common design however a bit more complex than Ann Reset Pt to Pt

• Compares index starting value on the policy’s index date to the average index value on “X” day of the month for 12 months after the index starting date.

• Apply adjusting factors; PR, Cap, Spread

• Gains locked in.

• Index Growth typically reduced due to the effects of averaging…averaging takes the “high’s” and the “low’s” and gives you a “middle ground”

Ann Reset/Ratchet w/ Mo. Avg. 100K Premium, 100% PR, 0.10% spread. No Cap.

Min Guar = 100% of prem at 1.50% (Jefferson Pilot Opti-Choice 7)

Year 1

• Pol index date 1/15/04 index value = 1000

• Add close of index value for 2/15/04 + 3/15/04 + 4/15/04 … + 1/15/05 = X

• Divide X by 12 = Mo Avg. index growth

• If X/12 = 1053 then 1053-1000 = 53 ; 53/1000 = 5.30% average index growth

• Apply Adjusting Factors - PR, Spread, Cap

• 5.30% mo avg index growth x 100% PR = 5.30% , less 0.10% spread = 5.20%

• AV at end of yr 1 = $105,200

Annual Reset w/ Monthly Average continued

Year 2

• Accum Value = $105,200• Pol index date 1/15/05 index value = 1100• Avg index value on 15th day of month for next 12 mo

= 920 (Negative index return)• No reduction to AV (Ratcheting)• Min Guar Value = 100K @ 1.5% for 2yrs = $103,023• If client cancels they get the higher of $105,200 or

$103,023, less surrender charges (2 Lines of Money)• End of Yr 2 AV = $105,200

Key Points to Consider w/ Mo Avg

• Last averaged point is the starting point for following year

• Typically Higher PR & Caps, Lower Spreads (may be misleading to clients/agents)

• Averaging will push values toward the middle; in a rising market avg will be lower than the end point, in a declining market avg will be higher than the end point

• More complex design

Annual Reset/Ratchet Performance Trigger Account (PTA)

• Newer EIA crediting method• Credits a specified interest rate as long as

measured index does not decrease• No adjusting factors used, just a fixed credited

rate as long as no index decrease• Earnings will be credited in a flat market• Easy to explain and understand• Limited upside potential• Works best in a flat or slightly increasing market

Annual Reset Ratchet Performance Trigger Account 100K deposit, 6.90% PTA crediting rate.

Min Guar=100% of Prem @ 1.75%Jefferson-Pilot New Directions I-66

Year 1

• Pol index date 1/15/04 index value = 1000

• Pol index Anniv 1/15/05 index value = 1000

• There has not been a decline in the index

• Monies allocated to this account earn 6.90%

• Accum Value @ end of yr 1 = $106,900

PTA example Continued

Year 2Beginning of year 2 AV = $106,900

• Pol index date 1/15/05 index value = 1000• Pol index Anniv 1/15/06 index value = 900• No index growth• Client does not lose money, but does not receive

any credited interest• Accum Value @ end of year 2 = $106,900• Minimum Guarantee account = $103,530

(100K compounded at 1.75% for 2 years)

Monthly Point to Point Annual Reset• Newest Design Available• Higher Upside potential • Compares percentage increase/decrease in

market index on a monthly basis.• Monthly increases are capped, decreases are not. • Sum of positive and negative months are added

up at the end of the year. Positive values are credited to AV.

• BEWARE !!!- Can easily be misrepresented to clients

Ann Reset/Ratchet w/ Mo. Pt to Pt. 100K Premium, 3% monthly cap, Min Guar = 90% of prem at 3%

• Pol issue date 8/1/04 S&P = 1000

• 9/1/04 S&P=1050 (1050-1000= 50/1000= 5% increase) capped at 3%. Growth = + 3%

• 10/1/04 S&P=900 (900-1050= -150/1050= -14.29% decrease)

• 11/1/04 S&P = 1200 (1200-900=300/900=33% increase, capped at 3%….

• Add up all positive and negative months

• +3, -14.29, +3…

• Earnings are credited on policy anniversary and locked in annually (Ratchet)

• Pros- Large potential upside

• Cons- Upside growth is capped, downside is not.

Regulatory Environment

• SB 620- CA/Similar in other States– 8 Hours Annuity CE; 4 Hours Ethics Follow up– Senior Visit Disclosure– Tax Implication Disclosure

• Suitability Disclosures

• NASD NTM 05-50

• AML

CPS EIA Annuity Carriers• Allianz Life (AM Best A)• AIG/American General (AM Best A+)• Fidelity & Guaranty (AM Best A)• Equitrust (AM Best A)• Lafayette Life (AM Best A+)• ING/USA (AM Best A+)• Business Men's Assurance (AM Best A)• Jefferson Pilot (AM Best A++)• Lincoln Benefit/Allstate (AM Best A+)• SunLife (AM Best A++)• Standard Insurance Co. of Oregon (AM Best A)• And many others…

CPS Insurance Websitewww.CPSInsurance.com

– Product Info; Current Rates; State Availability– 41 Compliance approved client handouts– 25 Broker focused training handouts– Lic/Contracting & Application Forms– Real time case status– Carrier strength & ratings info - Vital Signs– Client EIA Presentation Work Sheets– Multimedia Client and Agent Presentations– NEW EIA SECTION !!!

Did You Know ?

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wholesaler in the nation• Has 2 in-house Underwriters as well as an Advanced

Planning Attorney• Provides sales/planning assistance for advanced

concepts- Buy-Sell, 412i, Charitable Giving, etc.• Has Full Service Life, LTC and Annuity departments

CPS Annuities Contact Info

(800)326-5433Annuity@cpsinsurance.com

Pete Buechler CLU, FLMI, AAPA x 148

Dean Walsh AAPA, ACS x 143

Eric Neilsen x 126

Nicole Samson AAPA, ACS x 123

Thank you

CPS Annuities