Equity Indexed Annuities

Peter Buechler CLU, FLMI, AAPA

Manager, Annuity Marketing

CPS INSURANCE SERVICES

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

Agenda 6/15/05Webinar 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

• 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 or

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

• Accumulated Value (AV)- Premium and any credited earnings

• 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)

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. (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 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 (Ratcheted)

Annual Reset/Ratchet Pt to Pt 100K prem, 100% PR, 6.25% earnings cap, No

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

Year 1– Pol index date 1/15/04 index value = 900. Index

Anniv 1/15/05 index = 980– 980-900=80 pt increase; 80/900= 8.89% index

growth– Apply 100% PR=8.89% then cap at 6.25%.– You earn 6.25% for this contract yr. – AV @ end of yr 1 = $106,250

Year 2

AV= $106,250, Index start date 1/15/05, value = 980

• Compare to 1/15/06 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 $106,250 = 108,375

End of Yr 2 AV = 108,375

Bi-Annual Reset/Ratchet point to point

• Same design as Annual Reset/Ratchet except 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 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

Ann Reset/Ratchet w/ Mo. Avg. 100K Premium, 100% PR, 2.30% spread. No Cap.

Min Guar = 100% of prem at 1.5% (ING Selectra)

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 2.30% spread = 3.00%

• AV at end of yr 1 = $103,000

Annual Reset w/ Monthly Average continued

Year 2• Accum Value = $103,000• 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 = $103,022.50• If client cancels they get the higher of $103,000 or

$103,022.50, less surrender charges• End of Yr 2 AV = $103,000

Key Points to Consider w/ Mo Avg

• Last averaged point is the starting point for following year

• 2 consecutive negative years is more likely than with an Ann Reset Pt to Pt

• Typically Higher PR & Caps, Lower Spreads• 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 Performance Trigger Account 100K deposit, 5.50% 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 5.50%

• Accum Value @ end of yr 1 = $105,500

PTA example Continued

Year 2Beginning of year 2 AV = $105,500

• 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 = $105,500• Minimum Guarantee account = $103,530 (100K

compounded at 1.75% for 2 years)

Monthly Point to Point annual Reset

• Newest Design Available• Highest Upside potential of many designs• Compares 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 for credited rate.• 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

• Pros- Large potential upside

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

CPS EIA Annuity Carriers

• Allianz Life (AM Best A+)• 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+)• Keyport (AM Best A+)• North American (AM Best A)• And others…

CPS Annuities Website

www.CPSInsurance.com– Product info; Current rates, State Availability– 41 Compliance approve 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– Web Training– NEW EIA SECTION !!!

Did You Know ? CPS Insurance..

• Has been in business for 31 years

• Is contracted with over 50 highly rated carriers

• National Wholesaler licensed in all 50 states

• Is the LARGEST independently owned insurance wholesaler in the nation

• Has 3 in-house underwriters

• Provides sales/planning assistance for advanced concepts- Buy-Sell, 412i etc.

• Has a full service Life, LTC and Annuity Dept.

CPS Annuities Contact Info

(800)326-5433Pete Buechler CLU, FLMI, AAPA x 148

Dean Walsh AAPA, ACS x 143

Eric Neilsen x 126

Nicole Samson x 123

Thank you

CPS Annuities