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Equity Indexed Annuities

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Title: Equity Indexed Annuities

1
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

2
Agenda 6/15/05Webinar Duration 35-45 Mins

What is an EIA
Typical Client
Types of EIAs
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

3
What is an Equity Indexed Annuity (EIA)

Fixed Annuity- Guarantee of Principal
Benefits linked to an external equity reference
or an equity index (Typically SP 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

4
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

5
Types of EIAs

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

6
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)

7
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 _at_ 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)

8
Index growth adjusting factors

Participation Rate (PR)-Specifies the increase
in the index growth that you will participate
in.
Spread- AKAMargin, 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

9
Annual Reset/Ratchet Point to Point

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

10
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
980-90080 pt increase 80/900 8.89 index
growth
Apply 100 PR8.89 then cap at 6.25.
You earn 6.25 for this contract yr.
AV _at_ end of yr 1 106,250

11
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

12
(No Transcript)
13
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

14
Annual Reset/Ratchet with Monthly Average

Common design however more Complex than Ann Reset
Pt to Pt
Compares index starting value on the policys
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

15
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

16
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 _at_ 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

17
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

18
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

19
Annual Reset Performance Trigger Account 100K
deposit, 5.50 PTA crediting rate. Min Guar100
of Prem _at_ 1.75Jefferson-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 _at_ end of yr 1 105,500

20
PTA example Continued

Year 2
Beginning 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 _at_ end of year 2 105,500
Minimum Guarantee account 103,530 (100K
compounded at 1.75 for 2 years)

21
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

22
Ann Reset/Ratchet w/ Mo. Pt to Pt. 100K Premium,
3 monthly cap, Min Guar 90 of prem at 3