Understanding Your Choices

Transcription

1 An Educational Guide for Individuals Understanding Your Choices A guide to asset allocation Variable Universal Life III Investment Strategies

2 Contents 2 Asset Allocation 3 Diversification 4 Investment Approaches 4 Create Your Own Investment Mix 6 MML Allocation Funds 9 Investor Profile: Risk Tolerance Questionnaire 11 Dollar Cost Averaging 12 Portfolio Rebalancing 13 Directed Monthly Deduction Program When it comes to investing, each individual has unique goals, tolerance for risk and time horizons. To be successful, you must adhere to time-tested principles and stay true to the unique characteristics that you want your portfolio to exhibit. VARIABLE UNIVERSAL LIFE INSURANCE IS: NOT A BANK OR CREDIT UNION DEPOSIT OR OBLIGATION NOT FDIC- OR NCUA-INSURED NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY NOT GUARANTEED BY ANY BANK OR CREDIT UNION MAY GO DOWN IN VALUE

3 About This Guide This guide to asset allocation is designed to help you gauge what type of investor you are so that you can select the right combination of investments to meet your goals based on your tolerance for risk and time horizon. The included questionnaire will help you answer some key questions: How aggressively do you want to pursue investment growth? How willing are you to tolerate the ups and downs of the market? How much time do you have to let your investment grow? Before we learn about you, let s discuss the time-tested principles of investing asset allocation and diversification and the critical role they play in your investment strategy. The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. Early surrender charges apply for the first nine years of the policy and for nine years following a face increase. Those charges may decrease the value of the policy substantially depending on how early the policy, or any portion of it, is surrendered or accessed. While the policy allows for access to the account value in the short-term, through loans and withdrawals, there are costs and risks associated with those transactions. You should know that there may be little to no account value available for loans and withdrawals in the policy s early years. Additionally, unless required by law, you cannot reinstate a variable life insurance policy once it is fully surrendered. 1

4 Asset Allocation What is an Asset Class? An asset class is simply a type of investment. The three main asset classes are equity (also known as stock-based investments), fixed income (also known as bond-based investments), and cash (a commonly used term for money market instruments). The universe of equity and fixed income asset classes includes many categories which broadly define the market capitalization and style of an investment. Asset Classes Why is Asset Allocation Important? Asset allocation is among your most important investment decisions. It is the process of selecting and combining asset categories in varying percentages within a portfolio in order to help you meet your investment goals. Successful investing is most often achieved through a disciplined asset allocation strategy. In fact, research shows that it is the asset allocation decision that accounts for over 90% of the variation between returns on different investment portfolios over time. Equity Investments (stock-based) Value Stocks of attractively priced companies, such as those with low price/earnings and price/book ratios Small company Mid-size company Large company Growth Stocks of companies with strong prospects for growth in earnings Small company Mid-size company Large company International Stocks of companies located throughout the world, excluding the U.S. Developed markets Emerging markets Fixed Income Investments (bond-based) Government bonds High-yield bonds Asset-backed securities Cash Money market instruments Corporate bonds Foreign bonds Mortgage-backed securities Asset Allocation 91.5% 8.5% Market timing and security selection Asset allocation Source: Based on the study by Gary P. Brinson, Randolph L. Hood, and Gilbert L. Beebower, Determinants of Portfolio Performance II, Financial Analysts Journal, May/June The study analyzed data from 82 large corporate pension plans with assets of at least $100 million over a 10-year period beginning in 1977 and concluded that asset allocation policy explained, on average, 91.5% of variation in total plan return over time. This is the most recent study available on the topic. 2

5 Diversification Why Diversify Variable Life Insurance Investment Options? When planning your asset allocation strategy, it is important to remember that these are life insurance products. Unless you maintain the required premium level for your policy s no-lapse guarantee, your policy must have enough value to cover policy charges in order to remain in force. Fluctuations in underlying fund investment performance can have an effect on the charges associated with the life insurance components of your policy, and in turn, on your overall account value. Variable universal life insurance policies perform most efficiently when there is a smooth accumulation of values over time, rather than a highly volatile investment earnings pattern. Diversifying your investment options can help smooth some of the sharp ups and downs in investment performance. You cannot predict which investments will perform well or poorly. Diversification, or spreading your assets among a variety of investments, can help reduce the impact on your overall portfolio if a single investment option performs poorly. The idea is that different asset categories respond in a variety of ways to changes in the investment markets and the economy. By investing in a diverse collection of assets, a decline in one asset category may be offset by other asset categories that are unchanged or rising. a 2.5% increase in his or her portfolio that year. In addition, including fixed income investments in a portfolio often makes sense for all but the most aggressive portfolios. Bonds are generally less volatile than stocks and can help to reduce the overall volatility of a portfolio. However, it should be understood that diversification does not assure a profit or protect against loss in a declining market. Impact on Two Hypothetical Investment Portfolios Portfolio annual return 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% -7% -8% -9% -10% Portfolio A 100% large company U.S. stocks -10% Portfolio B 50% large company U.S. stocks 50% international stocks 2.5% This example is for illustration purposes only and is not meant to imply the performance of any particular investment strategy. leg leg Legend Legend How Does Diversification Work? Here is a simplified hypothetical example: if stocks of large U.S. companies are down 10% one year, an investor who only owns those types of stocks would experience a 10% decline in his or her portfolio s value. What if the same investor added international stocks to the mix, creating a portfolio composed of 50% large company U.S. stocks and 50% international stocks? Assuming the international stocks were up 15% that year, the investor would have a far smoother ride, realizing 3

6 Investment Approaches Having alternatives allows you to choose an investment strategy that you are most comfortable with. You can develop your investment strategy using one of two investment approaches described in the next few pages. 1. Create Your Own Investment Mix Select your own investment choices from the broad range below that spans various asset categories and investment styles. You can decide to use our Dollar Cost Average, Portfolio Rebalancing or Directed Monthly Deduction programs, each of which is described later in this brochure. Value Blend Growth Large Cap MML Equity (Oppenheimer/ Loomis Sayles) MML Equity Income (T. Rowe Price) MML Income & Growth (BlackRock) Fidelity VIP Contrafund Invesco V.I. Diversified Dividend MML Equity Index (Northern Trust) MML Growth & Income (MFS ) Oppenheimer Main Street MML Blue Chip Growth (T. Rowe Price) Oppenheimer Capital Appreciation Small/Mid Cap MML Mid Cap Value (American Century) MML Small/Mid Cap Value (AllianceBernstein) MML Small Cap Equity (Oppenheimer) MML Mid Cap Growth (T. Rowe Price) MML Small Cap Growth Equity (Waddell & Reed/Wellington) Oppenheimer Discovery Mid Cap Growth Note: Investment choices listed are available as of the date of this brochure. Investing involves risk, including the loss of principal. Each investment choice underlying the variable universal life policy has broad risks that apply to all investment choices, such as market risk, as well as specific risks inherent in particular types of investment choices that may subject your policy to greater risk and volatility than the general market. 4

7 Fixed Income Other Categories Global/International Money Market MML Money Market (Babson) 1 Inflation-Protected Bond MML Inflation-Protected and Income (Babson) Investment Grade Bond MML Managed Bond (Babson) Multi Sector Oppenheimer Global Strategic Income Asset Allocation MML Conservative Allocation MML Balanced Allocation MML Moderate Allocation MML Growth Allocation MML Aggressive Allocation Specialty Invesco V.I. Global Health Care Invesco V.I. Technology MML Managed Volatility (Gateway) PIMCO CommodityRealReturn Strategy VY Clarion Global Real Estate Global Equity MML Global (MFS ) Oppenheimer Global International Equity MML Foreign (Templeton) Oppenheimer International Growth 1 An investment in the fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or by any other government agency. Although the fund seeks to maintain a stable net asset value per share, it is possible to lose money by investing in these funds. 5

8 2. MML Allocation Funds Simple diversification with one fund. Diversification across brand name investment managers, asset classes, investment styles and market capitalizations. Actively managed funds with dynamic asset allocation strategies. For additional information on the MML Allocation Funds, see page 8. MML Conservative Allocation Fund 40% Equities 60% Fixed Income Modest growth potential Mild volatility Medium-term investment horizon Lowest-risk portfolio Fixed Income Large Cap Equity Mid Cap Equity Small Cap Equity International/ Global Alternatives Asset Allocation MML High Yield Fund (Babson) 4% MML Inflation-Protected and Income Fund (Babson) 4% MML Managed Bond Fund (Babson) 27% MML Total Return Bond Fund (MetWest) 13% MML Short Duration Bond Fund (Babson) 5% Oppenheimer Global Strategic Income Fund/VA 4% MML Blue Chip Growth Fund (T. Rowe Price) 4% MML Equity Income Fund (T. Rowe Price) 4% MML Focused Equity Fund (Harris) 1% MML Fundamental Growth Fund (Wellington) 3% MML Fundamental Value Fund (Wellington) 4% MML Income & Growth Fund (BlackRock) 2% MML Large Cap Growth Fund (Rainier) 3% MML Mid Cap Growth Fund (T. Rowe Price) 2% MML Mid Cap Value Fund (American Century) 2% Oppenheimer Discovery Mid Cap Growth Fund 1% MML Small Cap Growth Equity Fund (Waddell & Reed/Wellington) 1% MML Small Company Value Fund (T. Rowe Price) 1% MML Small/Mid Cap Value Fund (Alliance Bernstein) 1% MML Foreign Fund (Templeton) 2% MML Global Fund (MFS ) 3% MML International Equity Fund (Harris) 2% MML Strategic Emerging Markets Fund (Oppenheimer) Oppenheimer Global Fund/VA 2% Oppenheimer International Growth Fund/VA 2% Oppenheimer Global Multi-Alternatives Fund/VA 6% Funds offered in a fund-of-funds structure may have higher expenses than a direct investment in the underlying funds because a fund-of-funds bears its own expenses and indirectly bears its proportionate share of expenses of the underlying funds in which it invests. The above allocation percentages are rounded. The allocation among equity and fixed income funds therefore may not equal 100%. 6

9 MML Balanced Allocation Fund MML Moderate Allocation Fund MML Growth Allocation Fund MML Aggressive Allocation Fund 50% Equities 60% Equities 75% Equities 90% Equities 50% Fixed Income 40% Fixed Income 25% Fixed Income 10% Fixed Income Modest to medium growth potential Mild to moderate volatility Medium-term investment horizon Medium-risk portfolio Medium to high growth potential Moderate volatility Medium-term investment horizon Moderate-risk portfolio Asset Allocation High growth potential Considerable volatility Long-term investment horizon High-risk portfolio 3% 3% 1% Highest growth potential Considerable volatility Long-term investment horizon Highest-risk portfolio 4% 3% 4% 2% 23% 19% 11% 4% 10% 8% 5% 1% 4% 3% 2% 2% 3% 2% 5% 6% 7% 8% 4% 4% 5% 5% 2% 3% 4% 5% 3% 3% 5% 5% 4% 4% 5% 5% 3% 3% 3% 4% 3% 3% 5% 5% 3% 3% 5% 6% 3% 4% 5% 6% 1% 1% 2% 2% 1% 1% 1% 2% 1% 2% 2% 3% 1% 1% 2% 2% 3% 3% 4% 5% 3% 5% 6% 7% 3% 3% 4% 5% 2% 3% 4% 2% 2% 2% 2% 3% 2% 2% 3% 6% 6% 6% 6% The allocations to certain underlying funds in which an MML Allocation Fund currently invests are as of 5/1/15. MassMutual may change these percentages at any time and may invest in any other underlying funds, including any underlying funds that may be created in the future. 7

10 MML Allocation Funds Each of the MML Allocation Funds are known as a fund-offunds. Unlike other mutual funds that invest in stocks, bonds or money market instruments, funds-of-funds invest in other underlying mutual funds. Each fund provides diversification by investing in a combination of equity, fixed income and money market funds based on the specific asset allocation strategy of that fund. The MML Allocation Funds may have higher expenses than a direct investment in the underlying funds because a fund-of-funds bears its own expenses. Additionally, each fund-of-funds indirectly bears its proportionate share of the expenses of the underlying funds in which it invests. Ongoing Management MassMutual is the adviser for each of the MML Allocation Funds, and provides continuous monitoring of the funds. While the funds were constructed to maintain their equity to fixed income asset mixes, changes to the allocations of underlying funds may be made. The funds may rebalance their assets quarterly, and the asset allocation and fund manager selection will be reviewed at least annually. However, changes may be made more frequently if the adviser believes it needs to alter risk or take advantage of opportunities as the market changes. Diversification There are five MML Allocation Funds ranging from conservative to aggressive, which are well diversified across brand name investment managers, asset classes, investment styles and market caps. A risk tolerance questionnaire is available to help you match your tolerance for risk, time horizon and investment objectives with a corresponding MML Allocation Fund. 8

11 Investor Profile: Risk Tolerance Questionnaire Circle the point(s) (1, 2, 3, 4, 5) next to your answers, then refer to the scoring information following this questionnaire to determine your recommended asset allocation. Risk capacity 1. Your age: Points Age 1 Over to to to 54 5 Under Within the next six years, how confident are you that you will have sufficient liquidity to meet your ongoing expenses and any predictable financial obligations (e.g., mortgages, college expenses or dependent care services)? Points 1 not confident, unsure, or really don t know 2 somewhat confident 3 confident 4 very confident 5 completely confident 3. Which statement best describes your experience investing in equity markets? Points 1 I have not invested in stocks or mutual funds before or I am very dissatisfied with my equity investing experience; I don t understand the prospectus at all; I am uncomfortable with stock market investments; I don t know what risk vs. reward means. 2 I have had a very limited investing experience or I am somewhat dissatisfied with my past equity investing experience; I find the prospectus confusing; I would prefer a more conservative investment strategy; risk vs. reward makes me uncomfortable. Points 3 I have less than 10 years of experience investing in stocks or mutual funds; I am comfortable making some equity investments, but also want some balance with fixed income; I understand risk vs. reward ; I am comfortable seeking growth with fixed income. 4 I have years of experience investing in stocks or mutual funds; I carefully read the prospectus of any investment before investing; I am comfortable making equity investments; I understand risk vs. reward ; I am comfortable seeking greater capital appreciation with some fixed income. 5 I have more than 20 years of experience investing in stocks or mutual funds; I often refer to a prospectus or research online for investment details; I understand the idea of risk vs. reward ; I am confident in more aggressive investments. Risk attitude 4. Which best describes your attitude toward investing? Points 1 I cannot afford any possible loss of principal and worry a lot about market declines. 2 I prefer to have my entire portfolio invested in lowerrisk equity and fixed income assets, with less volatility and lower capital risk (typically, with lower returns). 3 I like to have a broadly balanced portfolio consisting of high, medium and low-risk investments, in a well-diversified mix of asset classes. 4 I seek mostly investments with a likely potential for high growth, with a minor stake in fixed income investments, tolerating market fluctuations without great concern. 5 I want higher returns, and will accept greater market volatility (and possibly, major setbacks), to try to achieve that goal with more aggressive investments. 9

12 5. Here are hypothetical returns for a $100,000 investment portfolio over a five-year investment period. Which characteristics do you find most acceptable for both reward and risk? Average Best Worst Points Annual Return Year Year % 15% 5% 2 6% 20% 10% 3 7% 25% 15% 4 8% 30% 25% 5 9% 40% 30% 6. Capital markets have always experienced significant price swings (rising and falling value). Imagine that your investment goal is five years away, but your well-diversified portfolio loses 20% of its value in a brief period. What best describes your reaction? Points 1 I would abandon that investment vehicle. 2 I would immediately switch to a more conservative strategy. 3 I would not wait until the year-end review before reorganizing my portfolio. 4 I would wait to reassess my portfolio at year-end review before making any big changes. 5 I would not alter my portfolio. 7. I would describe my current investing objectives/goals as: Points 1 Very conservative, and worried about equity investments; 2 Conservative, reducing exposure to market swings; 3 Moderate (with growth and income), or a more balanced strategy; 4 Growth-oriented, primarily, or 5 Somewhat aggressive. Scoring your answers: Add your score for each question. Your total score will determine the general type of investor you are. Once you know that, review the options available to you for ideas on how to diversify your VUL investment options. Total score: 7-10 points You may have identified serious investment concerns, and may require additional investment guidance and/or financial education. Equity investing may not be suitable for you points Your profile confirms conservative positioning; alternately, you might still have critical financial concerns, or have strong risk aversion to the fluctuations of equity investments points Your profile indicates you may be inclined toward a balanced style of investing, with conservative attributes points Your profile indicates you may be inclined toward a moderate growth style of investing, with a fairly secure outlook points Your profile indicates you may be seeking a portfolio with solid capital appreciation potential and relatively more risk (a growth style of investing) points Your profile indicates you may be geared toward an aggressive portfolio with strong capital appreciation potential and greater risk. The results of this questionnaire are intended to help you identify the type of investor you may be. Be sure to review the results with your financial professional before investing. This questionnaire is not meant to replace a thorough investment profile that your financial professional would complete with you.

13 Dollar Cost Averaging Dollar Cost Averaging is a method that can take some of the guesswork out of the timing of your investment decisions. You select an investment choice, typically a choice with lower risk, from which transfers will be made at selected intervals. By transferring pre-determined dollar amounts at regular intervals into investment choices you designate, you purchase more units when prices are low than when prices are high. A lower average cost per unit may be more achievable through Dollar Cost Averaging than through a lump-sum purchase of units or through non-level purchases of units. Dollar Cost Averaging does not assure a profit or protect against loss in a declining market, and involves continuous investment in securities regardless of fluctuating prices. You should consider your ability to continue investing through periods of low price levels. There is no charge for the Dollar Cost Averaging program. You may not elect Dollar Cost Averaging and Portfolio Rebalancing at the same time. MassMutual reserves the right to terminate, suspend or modify the Dollar Cost Averaging program at any time without prior notification to policyowners. Please see the appropriate product prospectus for complete details. A Hypothetical Example of Dollar Cost Averaging If $6,000 was invested into an investment choice in January when the price was $20 per unit, 300 units would be purchased at an average price of $20 per unit with an average cost of $20. If the same $6,000 is invested over six months ($1,000 a month), the total investment is still $6,000. However, due to the changing price per unit each month (see chart below), in June there would be 311 units. The average price per unit over the six months is $19.50 and the average cost per unit is $ When these numbers are compared to the average price and cost of $20 for the single payment of $6,000 in January, it is easy to see the potential benefits of Dollar Cost Averaging. Month Amount invested Unit price Units purchased January $1,000 $ February $1,000 $ March $1,000 $ April $1,000 $ May $1,000 $ June $1,000 $ Total $6,000 $ Average price $117 6 = $19.50 per unit Average cost $6, units = $19.29 per unit 11

14 Portfolio Rebalancing Portfolio Rebalancing is another automatic feature that adjusts for the varying investment performance among your investment choices. Rebalancing helps keep your account value allocations in sync with your investment objectives. As with any investment strategy, a key element of your variable universal life policy is selecting investment choices that correspond with your risk/return profile. Regardless of what risk profile is right for you, the investment choices you select may perform differently over time. When this occurs, your original allocation strategy may be lost. Your portfolio may have become riskier than you originally planned for, or may be too conservative for your needs. Portfolio Rebalancing automatically transfers account values among your designated investment choices so you maintain the asset allocation percentages you elected. This is done according to a schedule you choose (annually, semi-annually, quarterly or monthly). There is no charge for Portfolio Rebalancing. You may not elect Dollar Cost Averaging and Portfolio Rebalancing at the same time. MassMutual reserves the right to terminate, suspend or modify the Portfolio Rebalancing program at any time. A Hypothetical Example of Portfolio Rebalancing An asset allocation strategy based on a risk tolerance may call for allocation of 50% in fixed income investments (conservative) and 50% in equity investments (higher risk). Let s assume the account value is $2,000 initially, with $1,000 invested in equities and $1,000 invested in bonds. Over time, the equity portion of the portfolio may grow faster than the bond portion. Assuming that the equities have grown to $1,650 and the bonds have grown to $1,100, the allocation percentages are now 60% equity and 40% bond not the 50% equity/50% bond allocation originally chosen. At this point, the current allocation percentages are riskier than the original allocation strategy. Portfolio Rebalancing automatically transfers $275 from equities to bonds (according to the schedule selected) so that the original allocation strategy remains intact. A Hypothetical Example of Portfolio Rebalancing Original account value Over time After Portfolio Rebalancing 50% 50% 40% 60% 50% 50% Fixed income $1,000 Equity $1,000 Fixed income $1,100 Equity $1,650 Fixed income $1,375 Equity $1,375 12

15 Directed Monthly Deduction Program The Directed Monthly Deduction Program (DMDP) 2 lets you designate which of your policy s investment choices you use to pay monthly policy charges. The investment choices include a Guaranteed Principal Account and investment options. Electing DMDP can help build and maintain account value in certain investment choices while using another specified investment choice for monthly policy charges. How it Works The account value in a variable universal life policy resides in Separate Account investment divisions (also known as investment options ) and/or the Guaranteed Principal Account. When you pay premiums, you can allocate that money among the variable investment options and the Guaranteed Principal Account. You pay monthly policy charges using your account value. When DMDP is not elected, monthly policy charges are proportionately deducted ( pro-rata ) from all of the investment choices that hold account value. Electing DMDP lets you use one investment choice to pay monthly policy charges. It may make more sense to have your monthly charges deducted from an investment choice that is less likely to experience frequent changes in market value. For example, a money market investment choice or the Guaranteed Principal Account may be appropriate choices for DMDP because they typically have low volatility. By using the account value in this type of investment to pay your monthly policy charges, the account value you hold in other investment choices can continue to participate in the markets. You can elect DMDP at any time during the life of your policy. If you elect DMDP, you must select only one investment option or the Guaranteed Principal Account from which to pay monthly policy charges. There is no minimum account value required in the investment choice you elect. However, if the elected DMDP investment choice has insufficient value to cover the monthly policy charges, the charges will be deducted pro-rata from the remaining investment choices with account value. 2 It is important to note that electing DMDP does not ensure better performance from your investment choices, but does give you more control over how monthly policy charges are deducted. 13

16 MassMutual. We ll help you get there. There are many reasons to choose a life insurance company to help meet your financial needs: protection for your family or business, products to provide supplemental income and the confidence of knowing you will be prepared for the future. At Massachusetts Mutual Life Insurance Company (MassMutual), we operate for the benefit of our participating policyowners. We stand strong in the fundamental belief that every secure future begins with a good decision. And when choosing a life insurance company ownership, strength and stability matter. Learn more at This brochure must be preceded or accompanied by the current prospectus for Variable Universal Life III (VUL III) and the prospectuses (or summary prospectuses, if available) for its underlying investment choices. Before purchasing a variable universal life insurance policy, you should carefully consider the investment objectives, risks, charges and expenses of the policy and its underlying investment choices. Please read the prospectuses carefully before investing or sending money. Variable Universal Life III (VUL III) (Policy Form P2-2008, ICC08P2 and ICC08P2X in certain states, including North Carolina) is participating, variable universal life insurance. Dividends are not expected to be paid. The VUL III policy is issued by Massachusetts Mutual Life Insurance Company, Springfield, MA For investment performance results: (Use the Product/Fund Performance and Regulatory Documents drop-down menu under the Products and Solutions tab.) OR (24 hours/7 days a week) Principal Underwriters: MML Investors Services, LLC, MML Strategic Distributors, LLC. Subsidiaries of Massachusetts Mutual Life Insurance Company, 1295 State Street, Springfield, MA Securities offered through registered representatives of MML Investors Services, LLC, Member SIPC, Springfield, MA , or a broker-dealer that has a selling agreement with MML Strategic Distributors, LLC, Member SIPC Massachusetts Mutual Life Insurance Company, Springfield, MA All rights reserved. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives. LI CRN