© 2008 Morningstar, Inc. All rights reserved. 3/1/2008LCN200803-2013997

Understanding Deferred Annuities

Characteristics of Deferred Annuities

© 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Investment savings vehicles typically sold by insurance agents and financial advisors

Build retirement assets Few restrictions on the amount that can be contributed annually Tax-deferred accumulation Single or flexible payment Fixed or variable rate of return

Choice on how to withdraw money Lump sum As needed Annuitize

Benefits of Deferring Taxes

Hypothetical value of $10,000 invested in stocks. This example assumes an investor in the 28% bracket and an 8% annual total return. Estimates are not guaranteed. The illustration does not reflect the different fees and charges associated with variable annuities. If it did, the performance would be lower than cited above. This is for illustrative purposes only and not indicative of any investment. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

0

50

100

150

200

$250k

5 years 10 15 20 25 30 35 40 45to retirement

• Value of taxable account

• Value of tax-deferred account

There Are Many Annuity Features From Which to Choose

© 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Fixed Offer guaranteed interest rate for a set period of time

Variable Return and principal value fluctuates Investment flexibility

Choice of investment/asset allocation Dollar-cost averaging Automatic portfolio rebalancing

Living and death benefit options

Assets of Deferred Variable Annuities Are Rising1994–2007

Data through September 30, 2007. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

• Variable account assets

• Fixed account assets

1,200

1,000

800

600

400

200

0

$1,600 bil

200620052003200220012000199919981997199619951994 20072004

1,400

Annuity Distributions Can Be Received in a Variety of Ways

© 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Payout alternatives Lump sum Systematic withdrawals Annuitization (fixed or variable)

Single life only Single life only with full refund Single life only with period certain Joint & survivor Joint & survivor with period certain Fixed period

A Variety of Living-Benefit Options Are Available

Each benefit option is subject to additional fees. Violating terms and conditions of the contract may void guarantees. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Guarantees initial investment

(or some multiple) after a

specific number of years

Description

Target age

Other details

Guarantees a fixed floor of

income after a specified period

once contract is annuitized

Guarantees a return of

principal over time through

systematic withdrawals

5–10 years before, and

during, retirement

5–10 years before retirement 10–20 years before retirement

Available only during savings

and investment phase Investment restrictions may

apply

Must annuitize to receive

benefit Income for life Payout factors are lower

than those used to annuitize

actual account value Investment restrictions may

apply

Maximum withdrawal amounts

vary by contract Annuitization not required Single and joint lifetime

withdrawals are available Often able to step up guarantee

amount if market performs well Investment restrictions may

apply

Living-benefit option

Guaranteed minimum accumulation benefit (GMAB)

Guaranteed minimum income benefit (GMIB)

Guaranteed minimum withdrawal benefit (GMWB)

Living-Benefit Riders Are Becoming More CommonPercent of open variable annuity contracts offering as of December 2007

This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Past performance is no guarantee of future results. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

40%

36%

67%

70%

50

40

30

20

10

0

GMAB GMIB GMWB

60

Example of GMABIllustration of contract offering initial investment value after 10-year contract period

This is for illustrative purposes only and not indicative of any investment. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

$130k

120

110

100

90

80

70

10 9 8

Years to retirement

7 6 5 4 3 2 1 0

If contract value falls below initialvalue, the benefit will bring contractvalue back up.

• Initial purchase amount

• Hypothetical contract value

Example of GMIBIllustration of contract offering 5% compounding and a highest anniversary value

This is for illustrative purposes only and not indicative of any investment. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

10 9 8 7 6 5 4 3 2 1 Retirement

Must annuitize to receive benefit.

Receive the value that provides the greatest income stream.

Years to retirement

• Hypothetical contract value• 5% compound annual growth

• Highest anniversary value

Example of GMWBIllustration of contract offering 5% withdrawal benefit

This is for illustrative purposes only and not indicative of any investment. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

$120k

100

80

60

40

20

0

Years in retirement

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

• Hypothetical contract value• Cumulative withdrawals• Annual withdrawals

Variable Annuity Fees Increase With FeaturesAverage expenses for VA contracts with and without living-benefit options

This is for illustrative purposes only and not indicative of any investment. Past performance is no guarantee of future results. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

2.5%

2.0

1.5

1.0

0.5

0.0

No living-benefit riders With living-benefit riders

• Average MEA & distribution charges

• Average expense ratio

1.26%

2.16%

1.42%

2.45%

Investors Are Concerned About Beneficiary ProtectionIllustration of maximum anniversary value step-up

This is for illustrative purposes only and not indicative of any investment. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

3 42Year 1 5 6

• Current value

• GMDB annual step-up

• Anniversary mark

• Initial investment

Optional Death-Benefit Guarantees Are AvailableCommon variable annuity contract offerings

© 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Maximum anniversary value (MAV)Looks back at account value on anniversaries and guarantees at least as

muchas the highest value upon death

Rising floorSets a minimum death benefit value by compounding net premiums at a fixed annual rate of return

Earnings enhancement bonusAdds a fixed percentage payment to contract value at death, generally 40% under age 75 and 25% over age 75, although ages can vary

Evaluating the Suitability of Deferred Annuities

© 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Annuities can be complex, so it is important to gain an understanding of the following: Types Features Options/Riders Fees associated with purchasing the insurance protection