ValuTeachers/Life Insurance Company of the Southwest We Have Something that Nobody Else Does! Better and Safer Ways to Invest for Retirement!

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1 ValuTeachers/LSW (Life Insurance Company of the Southwest) Terry Thompson, Retirement Specialist 342 Camino Del Mundo, Fort Collins, CO Phone /Fax Liberty Common School Teachers, Staff and Employees 1725 Sharp Point Drive Fort Collins, CO /16/2010 Re: ValuTeachers/Life Insurance Company of the Southwest We Have Something that Nobody Else Does! Better and Safer Ways to Invest for Retirement! Dear Teachers and Staff of Liberty Common School, Our sole objective is to furnish the facts for your evaluation in retirement planning. The following is an analysis worthy of your review. Point #1 Starting to save for retirement now is absolutely necessary regardless of the amount you are currently able to. Time is a bigger factor than the money amount. Whether you have available a 401k/403b or an IRA (Traditional or Roth), it is important to start immediately. If you cannot save money long-term and if you feel that you may need this money prior to age 59-1/2 for other than education (children s or your own) or 1 st time home buying, then look at the Roth Plan. The following chart shows that rather than saving $250 per month on an after tax basis, you can save $333 on a pre-tax basis and still end up with the same take-home pay (25% bracket shown). Point #2 Now, where are you going to save for retirement? You basically have (3) choices. 1) Ultra safe annuities will grow at a similar rate as short term money market currently at 2%. Unfortunately this type of crediting will be very similarly paced with inflation with a 0 net gain. It is safe but also includes the sacrifice of potential growth. 2) Your second choice is mutual funds which have the risk of losing money but also the potential for increasing your returns. The 2008 market disaster vividly reminds us how vulnerable our money is when we invest in mutual funds. 3) The middle-of-the-road retirement vehicle is Fixed Index Annuities. Since retirement income is money that should be safe with minimal risk, index-type of retirement accounts offer the most benefit. Look at the returns ( ) below. Remember that we guarantee both your principal and past credited returns.

2 Employee/Staff Letter Page 2 S&P (Standard and Poor s 100) index based annuities will maintain their value regardless of any downturns in the economy. This is our guarantee. Do you really want to put your investment and past positive returns at risk when there are alternatives that guarantee both the principal (your actual investment contributions) as well as past returns (credited interest up to the last anniversary date)? In the actual results above based on the typical investment mirroring the average S&P index (typical S&P investment), you would have made less than a 1.04% total return on your money between September 1998 and September 2008 which is slightly more than.1% (1/10 th of one percent) as an average annual return. Please note that we did NOT account for any possible dividends that may have increased your investment return. With typical S&P index based annuities, you would have averaged over 5.6% annually for the same time period. You would have experienced this growth WITHOUT any risk of losing any money. The above chart represents each year of growth and decline. With any given year where there was a decrease or negative return, the value in your account remains unchanged (no loss). We assume in our example that there are no ongoing contributions, just the initial $100,000 investment. Years of negative return shows a -0- return for the Fixed Index Annuity. You do NOT receive as much of a return in the growth period and that is logically offset by the GUARANTEES of never having your money at risk. Let s take a look at another set of charts that illustrate this fact further. We certainly realize the attraction to other types of investments that offer a POSSIBILITY of a greater return. In the following, we are assuming $100,000 allocation into both an equity based or mutual fund investment and the same amount of money into a fixed interest rate or fixed index base account with guarantees of principal and interest. As is evident, the volatility of the left account reflects two years of 10% growth with the 3 rd year decreasing the same 10%. In a simple math analysis, one may believe that a participant still had a 10% return. However due to the fact that the drop happened in the 3 rd year, the real return is 8.9% over 3 years yielding less than a 3% average annual yield for this 3 year period.

3 Employee/Staff Letter Page 3 Point #3 Retirement Fears/Concerns - The two biggest concerns when we retire are: Will we outlive our retirement money and how can we maintain our independence if our personal age-based disabilities force us into some form of assisted living? An option is the Guaranteed Lifetime Income Rider (GLIR). The GLIR adds 7% guaranteed growth in the participating income fund that could later provide a lifetime income stream without transferring control of your money. The GLIR also includes our Enhanced Benefit Option providing additional money for assisted living costs at no additional charge. Since the future is unknown, providing complete flexibility is essential. The depletion of retirement money and living with age-based disabilities are two fears that retirees consider the most noteworthy. We address both fears with this optional rider.

4 Employee/Staff Letter Page 4 Point #4 What Company has a good solid track record and provides plan administrative support? LSW and its marketing arm, ValuTeachers, was the first company to offer fixed indexed annuities for flexible 403b premium accounts beginning in We service over 7,000 school districts across the United States. We are financially sound and well-known for full disclosure. Participants can always view their values and credited interest rates online. We provide on-premise workshops that educate teachers and staff on a range of issues regarding retirement. This large presence and workshop education is indicative of our commitment to the 401k/403b/457 arenas as well as IRA s (both simple and Roth). This commitment is proof that this is not sideline market participation. We invite you to visit LSW s website at that demonstrates our administrative support capability. Our free, fully accessible and unprotected website provides immediate availability of our: LSW Fact Sheet, Model Plan Language Examples and Information Sharing Agreement Examples/Instructions. We also provide separate and dedicated methods to contact our 403b Research Team. Point #5 Provide Complete Flexibility Within Your Plan Diversification is the key to protecting your investments. Consider the many retirement plan participants who lost 40% in 2008 as an example. This loss may have totaled over $40,000 within a once $100,000 valued account in 2007 which is not uncommon. Based on my analysis of typical 401k/403b retirement plans, participants who experienced serious losses in 2008 are allowed (3) basic choices: 1) Stay in the equity/bond market and ride it out. What goes down MUST go up (someday). 2) Transfer money to a money market fund within the family of mutual funds currently at approximately 1% with increased loads and charges (Bank CD typical rate range). 3) Transfer to an annuity that has a fixed short term interest rate also currently at approximately 2%. Since many of you will be retiring in the next years, if not sooner, what real choices are you offered? You have choices bordering on the extreme with no middle-of-the road alternative and certainly nothing to address common retirement fears of living too long combined with the possibility of requiring additional assisted living expenses. We therefore urge you to consider ValuTeachers/LSW as a viable retirement funding vehicle. Currently, you can only establish personal retirement plans through ValuTeachers/LSW outside your employer sponsored plan. Please contact your accounting office if there is interest in the Fixed Index Annuity becoming a retirement funding choice through your existing 403b plan. You can always contribute through a personal IRA or personal Roth IRA directly with ValuTeachers/LSW, but with a $5,000/$5,250 limitation and possible restrictions on tax deductibility based on your adjusted gross income. The above graphs illustrate the main points for your consideration and there are many other documents that may be helpful. This choice fills a gap that currently exists in your current plan, falling between the mutual fund market (volatile/risk) and the simple guaranteed money market (low interest/ultra safe). Sincerely, Terry Thompson, Retirement Specialist Fort Collins, CO 80524

5 CASE STUDIES ON IRA/ROTH WITHDRAWALS & CONVERSIONS ValuTeachers/LSW Terry Thompson, Retirement Specialist 342 Camino Del Mundo, Fort Collins, CO Phone /Fax CASE STUDIES Case Study #1 (SSI) Joe and Sally are married and are planning on retiring with a) Pension Income of $25,000/Yr. b) IRA/403b Distribution of $10,000. c) Interest from CD of $6,000. d) SSI of $20,000 (half of $20,000 is provisional income). Total Provisional Income Equals $51,000/Yr. Exceed $44,000 Threshold by $7,000-85% is Added = $ 5,950 Exceed $32,000 Threshold by $12,000 50% is Added = $ 6,000 Total to be Added to Income = $11,950 Current Taxation at 15% (Income Tax Cost) = $ 1,793 Converting to Roth IRA Changes Provisional Income to ($51,000 - $10,000 IRA Dist. = $41,000) = $41,000 Exceed $32,000 Threshold by $9,000 50% is Added = $ 4,500 Total to be Added to Income = $ 4,500 Current Taxation at 15% (Income Tax Cost) = $ 675 SAVINGS BETWEEN ROTH AND TAXABLE = $ 1,118/Yr. Case Study #2 (Partial-Hybrid Conversion) Herb and Mary are married, still working and are planning to retire in 5 years. They would like to convert their entire IRA/403b to a Roth IRA due to their belief that tax rates are going to increase and to avoid unnecessary SSI taxation. Their current taxable income is $57,000 (after deductions - Line 43 of Form 1040) per year which they expect to be relatively level until retirement. Since they will still have a small mortgage and need sufficient income in order to fully utilize itemized deductions, they would like to convert 50% of their $100,000 qualified retirement fund. Current Tax Bracket up to $ 67,000 = 15% Current Tax Bracket over $67,000 = 25% SOLUTION is to convert $10,000 per year for 5 years = $50,000 ASSUMING Tax Brackets to Remain the Same ($1,500 per Year) OR (Total Tax Cost to Convert) = $ 7,500 Case Study #3 (Partial-Hybrid Conversion) Tom and Julie are retired and receive $10,600 in SSI and another $40,000 in distributions from their IRA/Qualified Retirement Accounts (no other income). They have $15,600 in itemized deductions. Since there is $5,000 in excess deductions over and beyond the $10,600 in SSI, they would lose these deductions if the entire $40,000 would be converted to a Roth IRA. Therefore a partial or hybrid conversion may be better and they could take $5,000 from their traditional IRA/403b and still not pay tax. In conjunction with Case Study 1 above, Tom and Julie would also save SSI taxation if they could lower their traditional IRA/403b distributions to less than $26,700 which is the threshold of $32,000 (50% of SSI) $5,300.

6 OTHER CASE STUDIES Case Study #4 (Death) Susan opens a Roth IRA with a contribution at the age 62 and dies at age 63. Her beneficiaries could withdraw the contribution amount tax and penalty free. However, the earnings are not qualified until the Roth IRA has been open for five years. Earnings will therefore be taxed but no penalty exists due to both Susan s age (over 59-1/2) and occurrence of death which are both exemptions to the penalty provision. Case Study #5 (Withdrawal) John converted $20,000 to a newly created Roth IRA. The next year, he made a $3,500 Roth IRA contribution. Two years later, the $23,500 now includes $1,000 of earned interest for a total of $24,500. Now at age 42, John withdraws $6,000 to go on vacation. Under the ordering or layering rules, the first $3,500 represents his earlier contribution and is not taxed or penalized. The remaining $2,500 is from the conversion amount and has already been taxed. It is not taxed but a 10% penalty will be imposed on this amount since a vacation is not a qualifying event for an exception or exemption and therefore a $250 would be the penalty. CHANGE #1 If everything remains the same above but John is now 61 (conversion at age 58, contribution at age 59) and even though the conversion amount has not been in the Roth IRA for 5 years, there is no 10% penalty due to John s age being over 59-1/2. CHANGE #2 Everything being the same under Change #1 above but let s assume that the vacation withdrawal would deplete the ROTH IRA in its entirety. The only difference is adding the taxation of the $1,000 of earnings since the Roth IRA has not been established for 5 years so marginal tax bracket x $1,000 would be his total tax cost. IMPORTANT: Start your Roth IRA as soon as possible even though LARGE contributions or conversions may not be immediately possible. Case Study #6 (Withdrawal) Hank opened a Roth IRA in 1998 with a $25,000 conversion. A few years later he made a $2,000 contribution. As of 2007, he has accumulated $8,000 in interest earnings. Hank, now age 51, takes $30,000 out of his Roth IRA to buy a boat. This is not a qualified distribution because even thought the Roth IRA has been open for 5 years, buying the boat is not a qualifying event. Going through the ordering/layering rules for non-qualified distributions, we see that: a) The first $2,000 coming out is from a contribution and this money is NEVER taxed or penalized even though this money was added after the conversion money was added. b) The next $25,000 is coming from conversion money and is not taxed. Also it is not subject to the 10% penalty since it has been in the Roth IRA for more than 5 years. c) The remaining $3,000 of the withdrawal represents earnings. This portion is a non-qualified distribution and is therefore taxed. It is also subject to the 10% penalty since there is no qualifying exception (he s not over age 59-1/2, not dead, not disabled, etc.). Case Study #7 (Recharacterization) Jill converts her traditional IRA to a Roth IRA in February 2009 when its value was $50,000. She includes the $50,000 in income for her 2009 tax return. But the credit crunch hit Wall Street and now her Roth IRA is worth only $30,000. She doesn t want to pay tax on the $50,000 when her investment is now only worth $30,000. She has until October 15 th of the following year to recharacterize her conversion (or by October 15, 2010) and change it back to a traditional IRA. She can then file amended returns for a refund.