Understanding annuities once and for all

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UNDERSTANDING
ANNUITIES
Your guide to understanding
the fundamentals of annuities,
including their pros and cons, in
an easy to understand manner

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WE ARE ALL FAMILIAR WITH
ANNUITY TYPE PAYMENTS
SOCIAL
SECURITY
COMPANY
PENSIONS
STRUCTURED
SETTLEMENTS
LOTTERY WINNER
OPTION
ANNUITY TYPE PAYMENTS
A fixed sum of money or income payment paid to someone each year, typically for the rest of their life.
THESE ALL PROVIDE FIXED SUMS OF MONTHLY
PAYMENTS AND MAY BE CONSIDERED FORMS OF
ANNUITY PAYMENTS.

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An annuity can also be a product offered by a life insurance company. Every product has its pros and cons and its proper
place, use and function within an individual’s portfolio depending on personal circumstances and core financial priorities. The
diagram below provides a general idea of the relative risk and return placements for different products.
PRINCIPAL GUARANTEED OR INSURED* NON-PRINCIPAL GUARANTEED OR INSURED
Checking,
Savings,
Money Market
CDs, Treasuries,
Fixed Interest
Annuities
Fixed Indexed
Annuities
Cash Value
Indexed/Whole
Life Insurance
Cash Value
Variable
Life Insurance
Variable
Annuities
Stocks, Bonds,
Mutual Funds
REITS,
Commodities,
Options
+
Lower Risk = Lower Return Potential Higher Risk = Higher Return Potential
WHERE ANNUITY PRODUCTS FIT IN
* Individual guarantees or insurance vary for each product
+ While Money Market Funds are not principal guaranteed, we have included them here because of their relatively high level of safety

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The written agreement between an insurance company and a customer outlining each party’s obligations in an annuity
coverage agreement. This document will include the specific details of the contract, such as the structure of the annuity
(variable, indexed, or fixed), any penalties for early withdrawal, spousal provisions such as a survivor clause and rate of spousal
coverage, and more. Note: Breaking an annuity contract may result in certain penalties or surrender charges.
WHAT IS AN ANNUITY CONTRACT?
“Annuity Contract Definition | Investopedia.” Investopedia. Investopedia, 2014. Web. 02 May 2014
INSURANCE
COMPANY
PREMIUM +
CREDITED
INTEREST
YOU ANNUITY
CONTRACT
LIFETIME INCOME
OR LUMP SUM

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There are 4 primary categories that classify an annuity. All of these categories have different characteristics and they function in
slightly different ways. Each type of annuity can serve a purpose in an individual’s portfolio depending on their specific needs. It
is important to consider the level of risk involved in each of the options.
1 IMMEDIATE An annuity contract that is purchased with a single lump-sum payment and in exchange, pays a
guaranteed income that starts almost immediately.
2 FIXED INTEREST As its name implies, a fixed interest annuity is a type of contract that guarantees to return both
the investor’s principal plus a fixed rate of interest. These contracts essentially function much like
Certificate of Deposits (CDs), except that they grow tax-deferred.

3 FIXED OR
EQUITY INDEX
An equity-index annuity is a fixed annuity, either immediate or deferred, that earns interest or
provides benefits that are linked to an external equity reference or an equity index.
4 VARIABLE* An annuity contract in which the funds are typically invested directly in the stock market. Value
of the account may vary up or down based on the performance of the sub-accounts.
FOUR PRIMARY CATEGORIES OF ANNUITIES
NAIC Buyer’s Guide 2013
“Variable Annuities.” SEC.gov. U.S. Securities and Exchange Commission, Web. 17 Mar. 2014
www.investopedia.com/terms/i/immediatepaymentannuity.asp#ixzz3lw8ikWTF.
This presentation focuses on Fixed Index Annuities only

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FIXED INDEX ANNUITIES:
THE ACCUMULATION PHASE

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ANNUITY IS CONNECTED TO THE MARKET
INDEX VIA A CREDITING STRATEGY
Funds deposited in a Fixed Index Annuity are NOT invested directly in the market. Instead, they are linked to a market index
(e.g. S&P 500) by a mathematical formula called a Crediting Strategy. This formula determines the interest that will be credited
to the annuity based on the performance of the chosen index during a specific time frame during the Accumulation Phase and,
in some cases, during the Payout Period as well.
FIXED INDEX ANNUITY
Guarantees backed by the financial strength and claims paying ability of the issuing carrier.
FIXED INDEX
ANNUITY
STOCK MARKET INDEX
(E.G. S&P 500)

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UNDERSTANDING
CREDITING STRATEGIES
To determine how the insurance
company calculates returns it’s
important to understand how the
index is tracked, as well as how
much of the return of the index is
credited to the annuity. Crediting
strategies come in many forms.
Many annuities offer multiple
strategies and typically you can
change or combine strategies
each year on your annuity
anniversary date. Here are
the most common types of
credibility strategies.
Remember, for all Index Annuities,
when the linked market index or
crediting method is negative, your
annuity does not go down in value.
CAP-BASED
STRATEGIES
An upper limit put on the return over a certain time period.
For example, if the index returned 10% but the annuity had
a cap of 5%, you only receive a maximum 5% rate of return.
Many index annuities put a cap on the return. There are
different kinds of cap strategies—Annual, Average, Monthly,
2 year and 5 year are some examples.
UNCAPPED
STRATEGY WITH
PARTICIPATION
RATE
The percentage of the index’s return that the insurance
company credits to the annuity, typically ranging from 80%
to 100%. For example, if the market went up 10% and the
annuity’s participation rate was 80%, an 8% return (80% of
the gain) would be credited.
UNCAPPED
STRATEGY WITH
SPREAD/
MARGIN/
ASSET FEE
A percentage fee that may be subtracted from the gain
in the index linked to the annuity. For example, if an index
gained 18% and the spread fee is 3.5%, then the gain
credited to the annuity would be 14.5%.
UNCAPPED
STRATEGY WITH
SPREAD/MARGIN/
ASSET FEE PLUS
INTEREST BONUS
Works the same way as the illustration above with an
added interest bonus. In the above example the annuity
was credited with 14.5% interest, and with this strategy an
interest bonus would be added. For instance, 50% which
would bring the total interest credited to the annuity to
21.75% for the period.

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For illustration purposes only, here is a step by step visual of how Fixed Index Annuities work during the Accumulation Phase.
In the second part of this presentation, we’ll take a look at how FIAs work in the Distribution Period. To begin, funds are
deposited in the FIA. With most FIAs, the amount deposited is guaranteed never to go down in value except for any
withdrawals or fees that may be incurred. Remember, all guarantees are backed by the claims paying ability of the
insurance carrier.
YEARS
1 2 3 4 5 6 7 8
Your deposit is guaranteed never to go down due
to the negative performance of the associated index
DEPOSIT
$100,000
INDEX
FIXED INDEX ANNUITY ILLUSTRATION

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Let’s say that in Year 1 your chosen index rises and interest is credited to your account.
YEARS
DEPOSIT
$100,000
INDEX
1 2 3 4 5 6 7 8
Your annuity is credited with interest and the new
higher value is guaranteed not to go down due to
any negative performance of the associated index
in the future
Your chosen index rises and reaches a higher value

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Let’s say that in Year 2 your chosen index rises again and interest is credited to your account.
YEARS
DEPOSIT
$100,000
1 2 3 4 5 6 7 8
Your annuity is credited with interest and the new
higher value is guaranteed not to go down due to
any negative performance of the associated index
in the future
Your chosen index rises and reaches a higher value
INDEX

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Let’s say that in Year 3 your chosen index declines in value. In this case there is no interest credited to your account.
The value of your annuity remains the same as the value from Year 2 and is guaranteed not to fall due to index performance.
YEARS
DEPOSIT
$100,000
1 2 3 4 5 6 7 8
Your annuity is not credited with
interest, however, it also does not
suffer any losses
Your chosen index declines in value
INDEX

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Let’s say that in Year 4 your chosen index declines in value again. In this case there is no interest credited to your account.
YEARS
DEPOSIT
$100,000
1 2 3 4 5 6 7 8
Your annuity is not credited with interest
and does not suffer any losses
Your chosen index declines in value
INDEX

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Let’s say that in Year 5 your chosen index rises in value. Interest is credited to your account. The new value is once again
guaranteed not to decline in value due to the performance of the chosen index.
YEARS
DEPOSIT
$100,000
1 2 3 4 5 6 7 8
Your annuity is credited with
interest and the new higher
value is, again, guaranteed
Your chosen index rises
INDEX

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Let’s say that in Year 6 your chosen index rises in value again. Interest is credited to your account. The new value is once again
guaranteed not to decline in value due to the performance of the chosen index.
YEARS
DEPOSIT
$100,000
1 2 3 4 5 6 7 8
value is, again, guaranteed
INDEX

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Let’s say that in Year 7 your chosen index declines in value again. In this case there is no interest credited to your account.
YEARS
DEPOSIT
$100,000
1 2 3 4 5 6 7 8
Your annuity is not credited with
interest, however, it also does
not suffer any losses
Your chosen index
declines in value
INDEX

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YEARS
DEPOSIT
$100,000
INDEX
1 2 3 4 5 6 7 8
value is, again, guaranteed.
Let’s say that in Year 8 your chosen index rises in value once again. Interest is credited to your account. The new value is once
again guaranteed not to decline in value due to the performance of the chosen index.

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YEARS
DEPOSIT
$100,000
INDEX
1 2 3 4 5 6 7 8
Guaranteed Minimum Interest Rate
While your FIA’s earned interest is the result of the Crediting Strategy and the chosen index’s performance, there is a
Guaranteed Minimum Interest Rate that the FIA will earn over the life of the annuity. Many people misunderstand this
and think that the Guaranteed Minimum interest rate is earned in years when the Crediting Strategy credits no interest.
This is not true. The Guaranteed Interest Rate is for the term of the contract, not year by year.

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Many insurance companies will offer a premium or income bonus upon the purchase of the annuity. Here are some details and
definitions you should be aware of when assessing any annuities with bonuses.
PREMIUM BONUS Upon deposit the value of your annuity is immediately increased by a specified
percentage, e.g. you deposit $100,000 and the Bonus is 10%. Your annuity value will
increase to $110,000 immediately.
INCOME BONUS Upon deposit the value of your Income Account is immediately increased by a
specified percentage, e.g. you deposit $100,000 and the Bonus is 10%. Your annuity
income account value will increase to $110,000 immediately. This is the account that
determines your guaranteed income in the future—we cover this in the session on
Income Riders. As you will see, the Income Rider bonus may not be withdrawn as a
lump sum, but does add to the level of income received in the future.
VESTING PERIOD Most annuities that offer Bonuses (either Premium or Income Bonuses) have a vesting
period. This means that if you withdraw funds, terminate or pass away before the term
of the contract has ended, you may lose part of the bonus.
OPPORTUNITY
COSTS OF BONUS
Typically Bonus Annuities require additional commitments by you that are often
overlooked. These may be longer contract periods, lower caps, higher margins or
spreads, additional fees, and limitations on withdrawing lump sums at the end of the
annuity contract term.
ANNUITIES WITH BONUSES

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MARKET VALUE
ADJUSTMENTS
Annuity contracts often contain a
Market Value Adjustment (MVA)
clause. You should be aware of
what this clause means and how it
may impact you.
MARKET VALUE
ADJUSTMENT
Should you decide to withdraw your money outside of the
permitted withdrawal privileges provided by the annuity
contract, the amount you receive may be more or less than
what you invested.
In addition to potential withdrawal charges, if current interest
rates move higher than the contract guaranteed rate, you
may receive less than the amount you invested.
Conversely, if current interest rates move lower than the
contract guaranteed rate, the amount you receive may be
more than what you invested. The increase or decrease is
called a “market value adjustment.”
2013, March. “Understanding Fixed Annuities and Market Value Adjusted (MVA) Annuities.” Understanding Fixed Annuities and Market Value-Adjusted
(MVA) Fixed Annuities Morgan Stanley, Mar. 2013. Web. 27 May 2014.

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FIA ACCUMULATION
PHASE SUMMARY
Here is a summary of the features of
Fixed Index Annuities. Remember,
at this point we are considering the
Accumulation Phase. In the next
section we’ll take a closer look at
the Distribution Period.
MARKET AND INDEX RISE Interest is credited to your account
MARKET AND INDEX DECLINE Value of your annuity stays the same
PENALTY FREE
WITHDRAWALS
Typically up to 10% per year after the first year
REQUIRED MINIMUM
DISTRIBUTIONS
May be withdrawn without penalty
SURRENDER CHARGES May apply if withdrawals are greater than
Penalty Free Withdrawal
DEATH BENEFIT Surrender charges are typically eliminated
upon death
TERMINAL ILLNESS OR
NURSING HOME RIDER
May allow withdrawal of all funds without penalty
LAWSUIT PROTECTED Check with your state
FEES Fees for optional riders and surrender charges
may apply
PREMIUM OR
INCOME BONUSES
May be available

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FIXED INDEX ANNUITIES:
THE PAYOUT OR DISTRIBUTION PERIOD

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$
PAYOUT OR DISTRIBUTION PERIOD
INCOME
PAYMENTS
BEGIN
WITHIN
1 YEAR
There are a number of different ways that annuities may pay income during the Payout or Distribution Period. We’ll start with
an Immediate Annuity, where payments begin soon after you pay the premium (within 1 year) so there may be a very short
Accumulation Phase if any at all. Immediate Annuities require that you pay a lump-sum to the insurance carrier in exchange
for a lifetime of payments or payments for a specific period of time. Once payments have begun, there are usually no options
by which you can then take your lump sum, or part of your lump payment out. All future payments will be in the form of
income payments only.
PAYOUT PERIOD OPTIONS—IMMEDIATE ANNUITY
Insurer makes payments until the annuitant dies or for a fixed period

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The accumulation period for a deferred annuity is typically longer than that of an immediate annuity and usually lasts multiple
years. Like immediate annuities, there are a few different payout methods for deferred annuities that an annuitant can choose
based on their individual needs.
PAYOUT PERIOD OPTIONS—DEFERRED ANNUITY
OPTIONAL PAYOUT PERIOD
ACCUMULATION PHASE
(multiple years, no payments) Insurer makes payments until the
annuitant dies or for a fixed period

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OPTION 2 GUARANTEED LIFETIME WITHDRAWAL BENEFIT (GLWB)
Usually a Rider option (a “rider” is an addition to the base annuity) requiring an additional fee. With the
Guaranteed Lifetime Withdrawal Benefit an annuity owner can take annual withdrawals for life at a stated
percentage, based on his/her age, even if the annuity’s account value goes to zero. While you get payments
the money in your annuity continues to earn interest. This is a withdrawal option, the contract is not being
annuitized as many people mistakenly think.
The two primary Payout Period options after the Accumulation Phase are an Annuitization option similar to the Immediate
Annuity and a Guaranteed Lifetime Withdrawal Benefit (GLWB) option. Below we discuss the first payout option, annuitization.
The second primary Payout Period option is a GLWB. The GLWB option may also provide income for a lifetime or a specific
period but does not require annuitization of the annuity’s cash value.
PAYOUT PERIOD OPTIONS—DEFERRED ANNUITY
OPTION 1 ANNUITIZATION
The process of converting an annuity investment into a series of periodic income payments. Annuities may be
annuitized, over a long or short time period, or in some cases, in one single payment. As with an Immediate
Annuity, the value of the annuity is given to the insurance company in exchange for a stream of future
payments. That value may, in most cases, no longer be withdrawn as a lump sum or partial withdrawal.

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Guaranteed Lifetime Withdrawal Benefits have many designs but almost all do the same thing—they provide guaranteed
lifetime income in the future which, in most cases, are at predictable levels of income. In other words, it is possible through
the use of a GLWB to determine the exact (or minimum) amount of income you will receive at any time in the future, when you
decide to begin your income.
The longer you wait to begin your income, the higher the income guarantee. This benefit is sometimes called a
Lifetime Income Benefit Rider (LIBR) or Guaranteed Lifetime Income Benefit (GLIB).
INCOMEBENEFIT
ACCUMULATION PHASE
For illustration purposes only
THE GUARANTEED LIFETIME WITHDRAWAL BENEFITS (GLWB)

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When you want to begin your income, the insurance company will make a calculation to determine the amount of income that
your annuity will pay you, usually for the rest of your life. These calculations are based on two factors—the value of the Income
Account (the account that determines your income and is often different from the Annuity’s actual Account value or Cash value)
and a factor which is based on your age.
THE GUARANTEED LIFETIME WITHDRAWAL BENEFITS (GLWB)
x =
Each annuity calculates
this factor on a variety of
circumstances unique to the
annuity contract. For example,
this can be calculated based on
the age of the annuitant and, if
applicable, the joint annuitant,
the age at which the annuity
was purchased, the annuitant’s
gender and the age at which
you begin income payments.
AGE BASED
FACTOR
Your Guaranteed Income
can increase in three ways:
• The Income Account
value increases
• The age based factor
increases
• A combination of the two
GUARANTEED ANNUAL
INCOME FOR LIFE
This factor varies based on
the annuity purchased and
is also known as an income
rider. An income rider is an
optional benefit you turn
on for future payments and
can provide you with greater
income than the annuity itself,
but usually has an annual fee
associated with it.
INCOME
ACCOUNT VALUE

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In this example we look at a GLWB based on separate Income Account value. The Income Account value is a separate account
from the Cash or Account Value of the annuity. Typically, Income Account values are used only as a determinant for the amount
of income that will be distributed when you decide to take your income. The Income Account value is usually NOT a cash
account that you can withdraw or use in any other way other than as a reference to determine income payouts. Many annuities
will offer Income Account values that are guaranteed to grow over time, e.g. 7% compounded per
year – guaranteeing income will rise the longer you wait to begin taking income.
THE GLWB—VERSION #1 EXAMPLE
YEARS
DEPOSIT
$100,000
INDEX
1 2 3 4 5 6 7 8
Income Account
Value @ 7%
Annuity Account
or Cash Value

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x
AGE BASED
FACTOR
GUARANTEED ANNUAL
INCOME FOR LIFE
INCOME
ACCOUNT VALUE
When you want to begin your income the insurance company will make a calculation to determine how much income you will
receive for the rest of your life. That calculation, again, may differ from one annuity to another, but here is an example of a
typical calculation using the Income Rider value. There are three parts of the calculation described below.
$300,000
WAIT ONE MORE YEAR @ 7%
$321,000
EXAMPLE1EXAMPLE2
$15,000
$16,050
.05%
.05%
THE GLWB—SAMPLE CALCULATION VERSION #1
=

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THE GLWB—VERSION #2 EXAMPLE
YEARS
DEPOSIT
$100,000
INDEX
1 2 3 4 5 6 7 8
Income Account and Annuity Account
Value with Interest Bonus
Income Account and
Annuity Account Value
In this example the Income Account value is based on the value of the Annuity Account value. Typically, in this version, there is
a minimum amount of income guaranteed in the future regardless of the Account Value. If the Account Value rises over time,
however, there could be substantially higher income than the guaranteed minimum. Sometimes the insurance company will
offer an interest rate bonus, e.g. the annuity earns 8% interest for the year after deducting the expenses for the rider, then the
insurance company may give an interest rate bonus of 50% - so the total interest credited to the Account and Income value will
be 12%.

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In this example, waiting a year may not yield additional income, as was guaranteed in Version #1. Here, if there is no interest
earned during a year, the Income Account value and Annuity Account value will remain the same. As a result, waiting will not
increase income because the Income Account value has not increased. However, if the age based factor increases by waiting
an additional year, then the income will still rise even though there was no increase in the Income Account value.
THE GLWB—SAMPLE CALCULATION VERSION #2
x
AGE BASED
FACTOR
GUARANTEED ANNUAL
INCOME FOR LIFE
INCOME
ACCOUNT VALUE
$300,000
WAIT ONE MORE YEAR. IF
NO INTEREST EARNED THE
INCOME VALUE REMAINS
THE SAME $300,000
EXAMPLE1EXAMPLE2
$15,000
$18,000
.05%
HOWEVER, THE AGE BASED
FACTOR COULD INCREASE
.06%
=

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Unlike Annuitization, the GLWB is a withdrawal benefit. That means that funds are withdrawn from your Annuity Account or
Cash Value each time a distribution is made. It also means that if there is interest credited to your account that the balance of
your money is still earning interest. If the Cash value of your annuity should go to zero, under the GLWB the insurance company
will continue to pay you income for the rest of your life.
THE GLWB—WHERE THE INCOME COMES FROM
YEARS
DEPOSIT
$100,000
INDEX
1 2 3 4 5 6 7 8
INCOME OR GLWB PAYMENT
Example
Let’s say you begin income from your
GLWB in Year 4. Each time income is
distributed to you it will be deducted
from your Annuity Cash Account value.
When interest is credited the account
value will replenish part or all of the
withdrawal amount.

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Here is a summary of the features and benefits of the Guaranteed Lifetime Withdrawal Benefit (GLWB). Remember, we are
discussing the Payout or Distribution Period of the annuity.
INCOME GUARANTEE GLWB guarantees income for life to begin at a selected time
DEDUCTIONS GLWB distributions are deducted from the annuity’s Cash Account value
ACCOUNT VALUE GOES
TO ZERO
If the Cash Account value declines to zero, income payments will continue for life*
NO LUMP-SUM
WITHDRAWAL
Most often, the Income Account value is different from the Annuity Cash Account value
and may not be taken as a lump sum distribution—its only use is to determine your
income level when you decide to begin taking it
INCOME ACCOUNT AND
ANNUITY ACCOUNT
VALUE THE SAME
In some annuities, the Income Account value and the Annuity Account value are the
same. This may offer higher potential income but typically lower guaranteed values
FEES GLWBs usually require an additional fee. This fee will usually be deducted every year, even
in a year when no interest is credited to your account. In these cases, your Annuity Cash
Account value will decline
FIA PAYOUT OR DISTRIBUTION PERIOD SUMMARY
*If excess withdrawals decrease the account value below the minimum value as outlined in your specific contract, the rider terminates and your income payments stop.

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FIXED INDEX ANNUITITES SUMMARY

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Every product has pros and cons. While everyone has a different point of view and you can find various positive and negative
information and opinions in the public media and on the internet, here is a list of pros and cons which we consider to be
comprehensive, candid and fairly stated.
PROS CONS
Interest credited when market rises
No losses when market falls
Tax deferred growth
10% penalty free withdrawals
Penalty free RMD withdrawals
Premium or Income Bonus available
Death Benefit eliminates surrender charges
Terminal Illness and Nursing Home Riders available
May be protected from lawsuits
Guaranteed Income Riders (GLWB) available provides
guaranteed income regardless of performance
GLWB may rise during the payout period to keep up
with inflation
If GLWB causes account value to go to zero income
will still continue for life
Capped strategies limit participation in market increases
Uncapped strategies may have margins or spreads
Feature variations may make difficult to understand
Often confused with Variable Annuities
Earnings are taxed at ordinary income rates upon
withdrawal
Withdrawals prior to age 59 ½ are generally subject to
a 10% penalty unless certain circumstances apply
Annuity Account value may decrease in a zero interest
year due to optional Rider fees for GLWB
Surrender charges if withdrawals are taken above
10% penalty free withdrawal during surrender charge
period (contract term)
GLWB usually requires additional fees
THE PROS CONS OF FIXED INDEX ANNUITIES

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HOW THE INSURANCE COMPANY DOES IT
Many people say that FIAs are too good to be true! The fact is that they are created by insurance companies based on very
specific actuarial and market formulas and strategies that are geared to making the FIA a profitable investment for both the
annuity owner and the insurance company as well. While there are, of course, some pros and cons of annuities, the fact is that
they are a great fit in the right scenarios for many people! Here’s how they do it:
The Insurance Company has
spent the same amount of
money it has planned
to spend within its original
profit structure.
You do not suffer any losses
since your monies were not
invested in the market. You,
however, do not make any gains
that year.
You elect not to take the
guaranteed interest preferring
to link your funds to a market
index in hope of greater gain.
If the SP goes down, the
Insurance Company cannot
exercise the option and
loses the $3,000 option
purchase price.
If the SP goes up the Insurance
Company exercises the option
and credits you with interest
based on the option purchased.
The Insurance Company takes
$3,000 that it would have
given you and buys an SP
Institutional Call Option.
You purchase a Fixed Index
Annuity for $100,000.
Insurance Company offers a
guaranteed Fixed Interest of
3% or $3,000 for the year.
1
4
7
2
5
8
3
6

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ARE ANNUITIES SAFE?
A Fixed Index Annuity is backed by
the reserves, capital and surplus of
the issuing insurance company.
The company is regulated by state
insurance departments in the states
where it conducts business. A
key focus of each of these state
insurance regulators is the solvency
of the companies that operate in
their state.
LEGAL
RESERVE SYSTEM
Under the legal reserve system, a life insurance company
must have a policy reserve fund into which a large percentage
of each premium dollar goes. This fund is the method by
which a legal reserve life insurance company determines
the assets it must maintain in order to meet its future
commitments under the life insurance policies it has issued.
POLICY
RESERVE FUND
The policy reserve fund is considered a liability to the
company, not an asset of the company. In maintaining its
reserve fund liabilities, a life insurance company then has the
funds to pay the future living and death benefits guaranteed
by life insurance and annuity contracts when they come due.
STATE REGULATED Legal reserve life insurance companies are regulated at
the state level, with the state Departments of Insurance
monitoring the financial well-being of the insurance
companies headquartered in their state. Life insurance
companies must comply with the legal reserve requirements
established by the state in which they are headquartered
and must submit annual financial statements to the
insurance departments of each state in which they do
business, as well as undergo periodic examinations. If an
insurance company becomes “at risk,” it does not simply go
out of business, declaring the policies it has issued null and
void. Instead, the insurance department steps in to save the
company from going bankrupt and oversees the company’s
liquidation if it cannot be saved.
“Life Insurance Company Safety.” Life Insurance Company Safety. 2014. Web. 05 May 2014.

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ARE ANNUITIES SAFE?
In the unlikely event that the financial
condition of a carrier becomes
impaired, the State Insurance
department has the ability to take
over the operations of the company
in a process known as rehabilitation.
FAILURE RATES From 1986 through 2011, 31 companies that sold annuities
failed. Only 10 of those insolvencies came after 1995.
Problems with insurance companies and junk bonds in the
early 1990s resulted in state insurance regulators putting
tighter capital requirements on insurance companies. Most of
the companies that failed were smaller insurance companies
with low or no ratings from the agencies. Because of the
long-term nature of products such as annuities, regulators
hold insurance companies to higher standards of investment
and capital reserves.
PROCESS In most cases, insurance companies under financial duress
are simply snapped up by a competitor, and the policies
and annuities transfer seamlessly to the new company, with
terms and guarantees intact.
“Consumers should feel confident that their life insurance
policies are safe. We have a very strict system of state
regulation in the U.S. which sees to it that life insurers are
adequately capitalized, and that has kept the number of
insolvencies to a very minimal level.”
RESULTS “It’s very, very rare for a life insurer to become insolvent,”
says Michael Barry, spokesman for the Insurance Information
Institute, an industry trade group. “Life insurers are among
the best capitalized insurance companies out there.”
MacDonald, Jay. “Help! My Life Insurance Company Went Broke.” Help! My LIfe
Insurance Company Went Broke.
Bankrate.com, 27 Mar. 2013. Web. 27 May 2014.
“National Organization of Life Health Insurance Guaranty Associations.”Nolhga.
com. Web. 06 May 2014.
Plaehn, Tom. “How Safe Is a Lifetime Immediate Annuity From an Insurance
Company?” Finance. Zacks Research, 2011. Web. 05 May 2014.
“Life Insurance Company Safety.” Life Insurance Company Safety. 2014. Web. 05
May 2014.

39
Fixed Index Annuities are offered through licensed insurance professionals. Each state has different requirements for licensing
and some annuities may or may not offer different features depending on the state in which they are being offered. Regulation
of licensing and offerings in a state are governed by the state’s Division of Insurance.
WHO CAN
SELL FIAS
Only properly licensed Insurance Agents provide access to the purchase of Fixed
Index Annuities
COMMISSION The Insurance Agent will often receive a one time commission which is paid directly to the
agent from the insurance carrier. In other words, you do not pay the commission directly
out of your premium. Example: You deposit $100,000 into a Fixed Index Annuity. Your
Account Value will be $100,000 even though your agent will have received a commission
for the transaction
TRAILER
COMMISSIONS
Some insurance companies offer the option for the agent to take a lower commission up
front and earn a trailer over time.
PROS AND CONS Fixed Index Annuities have become quite popular and are often the main subject at
lunch and dinner ‘seminars’ that many insurance agents offer. While you may get good
information at these dinner at these events, remember that Fixed Index Annuities have their
pros and cons and may or may not be appropriate for your individual circumstances.
HOW FIXED INDEX ANNUITIES ARE SOLD

40
QUESTIONS YOU
SHOULD ASK
If you are considering an FIA, make
sure you ask the right questions.
Below is a list of suggested
questions which we recommend
that you ask and have answered to
your satisfaction before purchasing
an FIA.
• What is the guaranteed minimum interest rate?
• What charges, if any, are deducted from my premium?
• What charges, if any, are deducted from my contract value?
• How long is the term?
• What is the participation rate? For how long is the participation
rate guaranteed?
• Is there a minimum participation rate?
• Does my contract have a cap?
• Is averaging used? How does it work?
• Is interest compounded during a term?
• Is there a margin, spread, or administrative fee? Is that in addition to
or instead of a participation rate?
• Which indexing method is used in my contract?
• What are the surrender charges or penalties if I want to end my contract
early and take out all of my money?
• Can I get a partial withdrawal without paying charges or losing interest?
Does my contract have vesting?
• Does my annuity waive withdrawal charges if I am confined to a nursing
home or diagnosed with a terminal illness?
• What annuity income payment options do I have?
• What is the death benefit?

41
OTHER QUESTIONS
ON YOUR MIND
When considering the purchase
of a Fixed Index Annuity make
certain that all your questions are
answered. Use this page to jot
down thoughts and questions
that come up during your
considerations.

Understanding annuities once and for all

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