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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