Understanding Fixed Indexed Annuities

(1)

Understanding

Fixed Indexed Annuities

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This training presentation is designed to

ensure your understanding of the:

• General mechanics of flexible premium fixed

deferred indexed annuities.

• Importance of determining the suitability of this

type of annuity product for your client.

This presentation is

not

designed to fully train

you on any specific annuity. For product

specifics, refer to LegacyNet

®

_{, the product}

training presentation, annuity contract, product

brochures, and sales guides.

FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS. 2 LMG2664v1110

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Basic Concepts of

Fixed Indexed Annuities

A fixed indexed annuity (FIA) offers the same

features and guarantee of principal as a traditional

fixed deferred annuity. The main difference is:

• Traditional fixed deferred

annuity

—

Interest is

determined and declared each year by the insurer.

• Fixed indexed

annuity

—

Interest is based on a

crediting formula linked to an independent stock market

index. (You will learn how the different crediting

(4)

Basic Concepts of

Fixed Indexed Annuities

(cont’d)

• An FIA is

not

a stock market investment, a variable

annuity, a security, or an indexed mutual fund.

• An FIA does have a minimum guarantee. It also

provides clients an opportunity to achieve potentially

greater interest crediting, without the market risk.

• An FIA provides a minimum guarantee that varies by

product. A typical guarantee may be 1

–3% annually

on 87.5% of premium.

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FIA Key Terminology

• Cap

—The maximum percentage of interest

credited to the strategy value at the end of

the term.

• Floor

—The minimum interest credited

during a term period. The floor is usually 0%,

meaning no interest will be credited if the

index declines. This should not be confused

with the minimum contractual guarantee.

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FIA Key Terminology

(cont’d)

• Interest Crediting Strategies

—The options

that determine how index growth is credited

to your client’s annuity. May also be referred

to as Crediting Rate Strategies or Crediting

Methods, depending on the annuity.

• Liquidity

—Access to at least a portion of the

client’s premium. As a general rule, FIAs are

not

designed to address ongoing liquidity

needs.

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FIA Key Terminology

(cont’d)

• Participation Rate

—The percentage of index

increase that the client receives.

• Term

—The period over which index-linked

interest is measured. Interest is credited at

the end of the term.

• Minimum Guarantee

—

Varies by product, but

a typical guarantee is 1–3% annually on

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FIA Interest Crediting Strategies

The following descriptions provide a basic

understanding of current crediting strategies:

• They are not a prediction of how crediting

strategies will perform in the future.

• Not every crediting strategy is appropriate for

every client.

• Strategy availability varies by product, product

version, and state.

• Strategies may be added or discontinued at any

time.

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FIA Interest Crediting Strategies

Legacy offers products with two categories of

crediting strategies:

Shorter-term strategies

:

• Annual reset (point-to-point) with cap.

• Annual reset (point-to-point) with participation rate.

• Monthly averaging.

• Monthly cap.

• Gain-triggered.

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FIA Interest Crediting Strategies

Longer-term strategies

:

• Step Forward Strategy

®

_.

• Long-term* (point-to-point) with cap.

• Long-term* (point-to-point) with participation rate.

* For example: 3-year, 5-year, and 6-year strategies may be available.

The length of the long-term strategies varies by product, product

version, and state. See LegacyNet

®

_{for current availability.}

(11)

FIA Interest Crediting Examples

The following examples show hypothetical index

returns, caps, and participation rates and how these

impact contract crediting. The examples are intended

for training purposes only.

Please refer to the appropriate

Quick Reference

or

Earnings Rate Update

for current rates and caps.

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Annual Reset Strategy

(Point-to-Point)

This strategy type measures index growth year

by year, resetting the index’s starting point

annually at the level where it stands at the

beginning of each year. The annual results are

used to calculate the crediting rate. Depending

on the strategy, either a

participation rate

or

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Annual Reset Strategy

(Point-to-Point)

With Cap

Pros:

Easy to understand and performs well in

a volatile market. The contract owner

participates in index increases but is protected

by a floor when the index trends down.

Cons:

May have lower caps than a longer-

duration strategy.

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Annual Reset Strategy

(Point-to-Point)

With Cap

(cont’d)

Crediting Example 1

Assumptions:

• $100,000 premium.

• 8% cap.

• No withdrawals during the term.

• Index

increases

by 11.82% during the term.

100% of the index gain, up to the cap, is credited for an

end-of-term value of

$108,000

. This is locked in and

(15)

Annual Reset Strategy

(Point-to-Point)

With Cap

(cont’d)

Crediting Example 2

Assumptions:

• $100,000 premium.

• 8% cap.

• No withdrawals during the term.

• Index

decreases

by 4.08% during the term.

With a 0% floor, principal is protected from loss even though the

index return is negative. The end-of-term value is $100,000. This

remains the starting point for the next term.

(16)

Annual Reset Strategy

(Point-to-Point)

With Participation Rate

Pros:

Performs well in an increasing market.

The contract owner participates in index

increases but is protected by a floor when the

index trends down.

Cons:

May not be as simple for clients to

(17)

Annual Reset Strategy

(Point-to-Point)

With Participation Rate

Crediting Example 1

Assumptions:

• $100,000 premium.

• 70% participation rate.

• No withdrawals during the term.

• Index

increases

by 11.82% during the term.

70% of the index gain ($11,820) is credited for an

end-of-term value of

$108,274

. This is locked in and

becomes the starting point for the next term.

(18)

Annual Reset Strategy

(Point-to-Point)

With Participation Rate

(cont’d)

Crediting Example 2

Assumptions:

• $100,000 premium.

• 70% participation rate.

• No withdrawals during the term.

• Index

decreases

by 4.08% during the term.

With a 0% floor, principal is protected from loss even though the

index return is negative. The end-of-term value is $100,000. This

remains the starting point for the next term.

(19)

Annual Reset Strategy

Monthly Averaging

This strategy type measures the index growth

over a year period. At the end of the

one-year period, the interest credited is determined,

in part, by comparing the average of the past 12

monthly values with the value of the index at the

beginning of the one-year period.

(20)

Annual Reset Strategy

Monthly Averaging

(cont’d)

Pros:

Performs well in a volatile market

because it smoothes out the highs and lows of

index fluctuation.

Cons:

Does not perform well in a steadily rising

market, and may not be as simple for clients to

understand as a straight point-to-point strategy.

(21)

Annual Reset Strategy

Monthly Averaging

Crediting Example 1

Assumptions:

• $100,000 premium.

• 7% annual cap.

• No withdrawals during the term.

100% of the average monthly

gain, up to the cap, is credited

for an end-of-term value of

$103,650. This is locked in and

becomes the starting point for

the next term.

Month

Index Return

January

12.13%

February

0.59 March

4.26 April

5.84 May

7.86 June

4.35 July

7.81 August

-5.74

September

5.32 October

-3.45

November

4.46 December

1.57

(22)

Annual Reset Strategy

Monthly Averaging

Crediting Example 2

Assumptions:

• $100,000 premium.

• 7% annual cap.

• No withdrawals during the term.

With a 0% floor, principal is

protected from loss even

though the index return is

negative. The end-of-term

value is $100,000. This

remains the starting point for

the next term.

Month

Index Return

January

2.13%

February

0.59 March

4.26 April

-5.84

May

-7.86

June

4.35 July

-7.81

August

-5.74

September

5.32 October

-3.45

November

4.46 December

1.57

(23)

Annual Reset Strategy

Monthly Cap

This strategy measures the index growth over

a one-year period. A cap is applied to each

monthly gain. The monthly returns are totaled

at the end of the one-year period. The interest

credited is determined, in part, by comparing

the total of the past 12 monthly values with

the value of the index at the beginning of the

one-year period.

(24)

Annual Reset Strategy

Monthly Cap

Pros:

Performs well in a volatile market because

it captures the month-to-month changes of index

fluctuation.

Cons:

May set up unrealistic expectations for

clients.

(25)

Annual Reset Strategy

Monthly Cap

Crediting Example 1

Assumptions:

• $100,000 premium.

• 2.75% cap.

• No withdrawals during

the term.

The monthly gains, up to the

cap, are totaled and 100% of

the gain is credited for an

end-of-term value of $107,960. This

is locked in and becomes the

starting point for the next term.

Month

Index Return Strategy Return

January

6.13%

2.75%

February

0.59

0.59 March

-4.26

April

5.84

2.75 May

5.86

2.75 June

4.35

2.75 July

7.81

2.75 August

-5.74

September

5.32

2.75 October

-3.45

November

4.46

2.75 December

1.57

(26)

Annual Reset Strategy

Monthly Cap

Crediting Example 2

Assumptions:

• $100,000 premium.

• 2.75% monthly cap.

• No withdrawals during the term.

With a 0% floor, principal is

protected from loss even

though the index return is

negative. The end-of-term

value is $100,000. This

remains the starting point for

the next term.

Month

Index Return Strategy Return

January

-1.56%

February

-2.08

March

3.67

2.75 April

-6.17

May

-8.80

June

-7.25

July

-7.90

August

0.49

0.49 September

-11.00

October

8.64

2.75 November

5.71

2.75 December

-6.03

(27)

Gain-Triggered Index Strategy

SM

This strategy compares the index value on

the last day of the term with the index value at

the beginning of the term. If the index

increases or remains unchanged, the rate

specified on the allocation date will be

credited. If the index has decreased in value,

no interest will be credited.

(28)

Gain-Triggered Index Strategy

SM

Pros:

Performs best in slightly rising markets.

One of the easiest IA crediting strategies for

clients to understand because there is no cap

or participation rate to explain.

Cons:

Does not perform well in markets with

downturns followed by large upswings.

(29)

Gain-Triggered Index Strategy

SM

Crediting Example 1

Assumptions:

• $100,000 premium.

• 5% specified rate.

• No withdrawals during the term.

• Index

increases

by 1.50% during the term.

The specified rate (5%) is credited for an end-of-term

value of

$105,000

. This is locked in and becomes the

starting point for the next term.

(30)

Gain-Triggered Index Strategy

SM

Crediting Example 2

Assumptions:

• $100,000 premium.

• 5% specified rate.

• No withdrawals during the term.

• Index

decreases

by 5.64% during the term.

With a 0% floor, principal is protected from loss even

though the index return is negative. The end-of-term

value is

$100,000

. This remains the starting point for the

next term.

(31)

Long-Term Strategy*

(

Point-to-Point)

This strategy measures the difference between

the index value on the last day of the term and

the index value on the day premium was

originally allocated. The result is used to

calculate the crediting rate. Depending on the

strategy, either a

participation rate

or a

cap

will apply.

* For example: 3-year, 5-year, and 6-year strategies may be available. The

length of the long-term strategies varies by product, product version, and

state. See LegacyNet

®

_{for current availability.}

(32)

Long-Term Strategy

(

Point-to-Point)

(cont’d)

Pros:

Performs best in a bullish market

environment.

Cons:

Does not perform well in a highly volatile

market that does not trend up over time. Clients

who want to monitor gains may be frustrated

because index gains are not realized until the

end of the term.

(33)

Long-Term Strategy

(Point-to-Point)

With Cap

Crediting Example 1

Assumptions:

• $100,000 premium.

• 10% cap.

• No withdrawals during the term.

• Index

increases

by 19.50% during the term.

100% of the index gain, up to the cap, is credited for an

end-of-term value of

$110,000

. This is locked in and

(34)

Long-Term Strategy

(Point-to-Point)

With Cap

Crediting Example 2

Assumptions:

• $100,000 premium.

• 10% cap.

• No withdrawals during the term.

• Index

decreases

by 7.63% during the term.

With a 0% floor, principal is protected from loss even

though the index return is negative. The end-of-term

value is

$100,000

. This remains the starting point for the

next term.

(35)

Long-Term Strategy

(Point-to-Point)

With Participation Rate

Pros:

Performs well in an increasing market. The

contract owner participates in index increases but is

protected by a floor when the index trends down.

Participation rates may be higher than shorter-term

strategies.

Cons:

Does not perform well in a highly volatile

market that does not trend up over time. Clients who

want to monitor gains may be frustrated because

(36)

Long-Term Strategy

(Point-to-Point)

With Participation Rate

Crediting Example 1

Assumptions:

• $100,000 premium.

• 80% participation rate.

• No withdrawals during the term.

• Index

increases

by 19.50% during the term.

80% of the index gain ($19,500) is credited for an

end-of-term value of

$115,600

. This is locked in and

becomes the starting point for the next term.

(37)

Long-Term Strategy

(Point-to-Point)

With Participation Rate

Crediting Example 2

Assumptions:

• $100,000 premium.

• 80% participation rate.

• No withdrawals during the term.

• Index

decreases

by 7.63% during the term.

With a 0% floor, principal is protected from loss even

though the index return is negative. The end-of-term

value is

$100,000

. This remains the starting point for the

next term.

(38)

Step Forward Strategy

®

(

Annual Point-to-Point 3-Year High-Water Mark Strategy)

This strategy measures the difference between:

• The index value on the last day of each year

during a three-year term.

• The index value on the day premium was

originally allocated.

It locks in gains every three years at the highest

contract anniversary value.

(39)

Step Forward Strategy

®

(Annual Point-to-Point 3-Year High-Water Mark Strategy) (cont’d)

Pros:

Caps are generally higher than other types

of strategies. Locks in caps for three full years.

Cons:

May be more difficult to explain to clients.

Clients who want to monitor gains may be

frustrated because gains are not realized until the

end of the term.

(40)

Step Forward Strategy

®

Crediting Example 1

Assumptions:

• $100,000 premium.

• 9% cap.

• No withdrawals during the term.

• Anniversary values:

–

$110,000 end of Year 1.

–

$120,000 end of Year 2.

–

$129,503 end of Year 3.

100% of the index gain, up to the cap, is credited. The

end-of-term value is $129,503. This is locked in and

becomes the starting point for the next term.

(41)

Step Forward Strategy

®

Crediting Example 2

Assumptions:

• $100,000 premium.

• 9% cap.

• No withdrawals during the term.

• Anniversary values:

–

$130,000 end of Year 1.

–

$140,000 end of Year 2.

–

$129,503 end of Year 3.

100% of the index gain, up to the cap, is used in calculating the

year-end values. The highest anniversary value is locked in even

though the index declines between that date and the end of the

term. This value, $140,000, is locked in and becomes the starting

point for the next term.

(42)

Need-To-Know When

Identifying and Communicating

With the Fixed Indexed

(43)

Fixed Indexed Annuity Buyer

Need-To-Know

• In general, fixed indexed annuity buyers are as young

as their late 40s. Because fixed indexed annuities are

designed for people with a relatively long investment

horizon, younger clients looking for safety of principal

are ideal candidates.

• Consider the shorter surrender charge products for

older clients who may have less need for liquidity.

• Other buyer types include people who invest in bonds

and/or bond mutual funds and are accustomed to risk

on a portion of their invested savings. These buyers

typically do not need to access their premium except

in emergencies.

(44)

Fixed Indexed Annuity Buyer

Need-To-Know

(cont’d)

• IRA and tax-qualified accounts are appropriate if

clients do not need to begin taking minimum required

distributions (MRDs) within the term period. Clients

may incur loss of interest if the MRD is required

before the end of the strategy term.

• Fixed indexed annuities are best suited for clients

with long-term investment horizons and long-term

accumulation needs.

• When recommending a fixed indexed annuity for all

or part of a client’s premium, avoid comparing it with

securities or other investments.

(45)

Fixed Indexed Annuity Buyer

Need-To-Know

(cont’d)

Help clients plan for retirement by

emphasizing these points about a fixed

indexed annuity:

• Offers a combination of safety (guarantee of principal)

and a rate of return that may outpace inflation.

• Provides the potential for returns that may be greater

than those available with money-market funds, savings

accounts, CDs, and fixed-rate annuities, but with no

additional risk of principal.

(46)

Fixed Indexed Annuity Buyer

Need-To-Know

(cont’d)

Remember:

• Do your fact-finding.

• Assess your clients’ goals.

• Determine your clients’ long- and short-term

needs to ensure the suitability of your

(47)

Fixed Indexed Annuity Buyer

Need-To-Know

(cont’d)

Remember:

• Understand the product you are selling.

• Emphasize the contract minimum guarantees.

• Market the product as a fixed annuity, not as

an investment or security.

• Explain how and when the cap or participation

rate can change.

(48)

Fixed Indexed Annuity Buyer

Need-To-Know

(cont’d)

Remember:

• Emphasize the protection from market loss.

• Describe the IA as a long-term retirement

vehicle.

(49)

Fixed Indexed Annuity Buyer

Need-To-Know

(cont’d)

Remember:

• Interest earnings are not credited until the end of

the index term.

• Interest will only be credited to the values

remaining at the end of the term.

• Therefore, it is recommended that any withdrawals

from the index strategies either be taken at the

end of the term or come from the Guaranteed

One-Year (Fixed Rate) Strategy.

(50)

Fixed Indexed Annuity Buyer

Need-To-Know

(cont’d)

Remember:

• Even though fixed indexed annuity values are

affected by an external index, they are not an

investment in the stock market and do not

participate in any stock, bond, or equity

investments.

• The index does not reflect dividends paid on

the stocks underlying the index.

(51)

Fixed Indexed Annuity Buyer

Need-To-Know

(cont’d)

Do

not

:

• Focus on the index interest features without

explaining the fixed annuity features such as

guarantees and income options.

• Use investment terms such as ―stock market,‖

―security,‖ ―investment returns,‖ or ―Wall Street‖

when describing fixed indexed annuities.

(52)

Fixed Indexed Annuity Buyer

Need-To-Know

(cont’d)

Do

not

:

• Use sales material that is not approved by

the insurance company.

• Compare fixed indexed annuities to

mutual funds.

• Compare fixed indexed annuities to

variable annuities.

(53)

Resources

Visit www.legacynet.com under the

Products

tab

for resources, including:

• Sales guides.

• Quick Reference sheets.

• Marketing materials (brochures, inserts, and

preapproved ads).

(54)

Resources

(cont’d)

Visit www.legacynet.com under

The Forms Store

tab for resources, including:

• State-specific forms.

• Applications.

(55)

Resources

(cont’d)

Visit www.legacynet.com under the

Marketing

Tools

tab for resources, including:

• Fact-Finder―Client Data Sheets.

• Sales Solutions kits.

(56)

Resources

(cont’d)

Information is also available from your upline or

(57)

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