ProSaver Index Series Annuity Tax-Deferred Indexed Annuity

Transcription

1 ProSaver Index Series Annuity Tax-Deferred Indexed Annuity Client Brochure PAC /07

2 C e l e b r a t i n g Protective Life Doing the right thing is smart business. Celebrating its 100th year of service, Protective Life Insurance Company was built upon a belief in hard work and integrity. The Company s continued commitment to these timeless principles is reflected in its dedication to three core values: quality, serving people, and growth. Protective Life Insurance Company s values-oriented management philosophy was established by its founder, former Alabama Governor William Dorsey Jelks. Governor Jelks left an indelible imprint on the Company by insisting that quality in products, in service, and in people be the standard applied to every aspect of its business. Understanding that serving people begins with being worthy of their trust, Jelks initial pledge to Protective Life s customers, shareholders, and employees remains today the focus of the Company s leadership. One hundred years later, Protective Life Insurance Company is one of the nation s leading insurance companies, providing financial security to individuals and families across the country through a broad portfolio of life and specialty insurance and investment products. Drawing upon the strengths of the past, while maintaining a keen eye toward the future, the Company s employees nationwide are dedicated to affirming the wisdom of our collective vision: Doing the right thing is smart business. A Look Back 1907 Governor William Dorsey Jelks founds Protective Life Insurance Company, as Theodore Roosevelt begins his seventh year as U.S. President Protective Life pays its first death claim The U.S. enters World War I Samuel Clabaugh becomes president of Protective Life upon its merger with Alabama National Life. Calvin Coolidge holds the office of U.S. President Protective Life celebrates its Silver Anniversary, with over $65 million of insurance in force Colonel William J. Rushton assumes the top leadership position at Protective Life, as U.S. President Franklin D. Roosevelt serves his second term. 2 2

3 1 0 0 Y e a r s Financial Strength Insurance companies must be financially strong and reliable in order to fulfill future obligations, such as paying claims and servicing policies. Every year, independent ratings services conduct reviews to measure the financial strength of insurance companies. Protective Life Insurance Company has more than $252 billion of coverage in force to date.* A+ (Superior, 2nd highest of 15 ratings) from A.M. Best AA (Very Strong, 3rd highest of 21 ratings) from Standard & Poor s AA- (Very Strong, 4th highest of 22 ratings) from Fitch Aa3 (Excellent, 4th highest of 21 ratings) from Moody s Investors Service Each of these independent rating agencies has assigned its rating based on a variety of factors including Protective Life Insurance Company s operating performance, asset quality, financial flexibility and capitalization.** * As of 1/1/07 ** These ratings are current as of June For more current information, please visit Products to Meet a Variety of Needs Protective Life Insurance Company offers a wide range of high-value, competitive life insurance and annuity products, including: Variable Annuities Fixed Annuities Immediate Annuities Variable Universal Life Universal Life Insurance Term Insurance Our product portfolio can help people manage the financial risks associated with protecting their families or businesses, and help them prepare for long term needs like retirement and estate planning. Ask your sales agent for more information about these products and how they may help you meet your long-term financial goals The U.S. enters World War II Protective Life celebrates 50 years, with insurance in force approaching $1 billion Billy Rushton becomes the fourth CEO of Protective Life as Richard Nixon begins his first year as U.S. President Drayton Nabers Jr. is named CEO of Protective Life, while George H.W. Bush serves his final year as U.S. President West Coast Life is acquired, solidifying Protective s national presence John D. Johns becomes CEO of Protective Life, while George W. Bush serves as 43 rd U.S. President The company promotes its core belief: Doing the right thing is smart business Chase Insurance Group is acquired, representing Protective s largest acquisition to date. Insurance in force surpasses $252 billion. ProSaver Index Series 3

4 Introducing the ProSaver Index Series Annuity Thank you for considering the ProSaver Index Series Annuity as a part of your long-term financial plan. The ProSaver Index Series Annuity, a fixed annuity from Protective Life Insurance Company, can provide specific features, such as an ongoing stream of annuity payments for as long as you live, to help you plan for retirement. This brochure and accompanying materials are designed to explain the features and benefits of this product and to help you decide if it is right for your needs. The ProSaver Index Series Annuity may be right for you if... You are concerned about outliving your retirement savings An annuity can provide you with regular payments to supplement other sources of retirement income. In fact, an annuity is the only product you can buy that can provide the security of a payment stream that will last as long as a lifetime. You are concerned with the security of your money as it grows The ProSaver Index Series Annuity is a fixed annuity that provides you with the assurance that you can maintain or grow your money without downside market risk. We ll explain how this is possible on page 8 as we discuss how interest is credited to your annuity. Keep in mind surrender charges may apply to early withdrawals. You are looking for potentially higher interest earnings With interest options linked to the S&P 500 Index, the ProSaver Index Series Annuity has the potential to credit interest higher than fixed rate alternatives. You are interested in tax-deferred growth Annuities allow you to defer paying taxes on your interest earnings until they are withdrawn or distributed, which may enable your money to compound and grow more efficiently. You want to provide for your loved ones in the event of your death The ProSaver Index Series Annuity can provide a death benefit payable directly to your named beneficiaries, avoiding the cost, delay and publicity of probate. Considering Your Financial Needs As with the purchase of any financial product, you should consider a variety of factors in determining the suitability of the ProSaver Index Series Annuity in meeting your own needs. We urge you to discuss your financial status (current income, liquid assets, how much you need to live on, etc.), financial objectives, tax status, and other areas of importance with your sales agent before you purchase an annuity or other insurance or investment products. Together, you can determine whether the product fits with your time horizon, liquidity needs, risk tolerance, and financial experience. 4

5 Preparing for The New Retirement Life Expectancy in the U.S. Just a generation or two ago, many retirees looked to Social Security and pension benefits as the source of lifetime financial security. People also generally lived shorter, less active lives in retirement than they do today. Age It s a different picture today. People are retiring earlier than in the past. Because people are living longer, it s clear that they ll need more substantial funds to see them through longer times in retirement. The prospect of a long and active retirement is good news. However, paying for that longer retirement comes at a higher cost. Once you factor in potentially rising prices the challenge is even tougher. Over the last 20 years, the cost of living has increased over 80% (Bureau of Labor Statistics, 2004). It s no wonder that so many are concerned about keeping up with rising costs before and during retirement. The challenge is even greater because many future retirees don t count on traditional sources of retirement security being there once they retire. Defined benefit pension plans, once a component of most Americans retirement planning, are increasingly rare. Reports abound about the uncertain future of Social Security. The government now projects that Social Security tax revenues will fall short of program costs by 2017, and that trust fund accumulated reserves will be exhausted by Changes to the program may lie ahead, but even in its current form, Social Security alone isn t the answer for most retirees. In fact, the average monthly Social Security benefit for all retired workers in 2006 was just $1,044; for a couple with both receiving benefits, the average amount was just $1, Earned Income Workers with Defined Benefit Pension Plans Investment Income Pension Social Security Other Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2004 Revision. 70% 60% 50% 40% 30% 20% 10% 0% 60% 26% 11% Source: Center for Retirement Research at Boston College, June 2007 Sources of Retirement Income (for those age 65 and over, earning over $44,129 annually) 2.0% 18.9% 40.1% 21.2% 17.8% 1 The 2005 Annual Report of the Board of Trustees of the Federal OADSI Trust Funds 2 Social Security Administration, 2006 Source: Morningstar Presentation Materials 2007 Morningstar, Inc.. All rights reserved. Used with permission. ProSaver Index Series 5

6 Planning for The New Retirement Annuities may offer appropriate answers to some of the challenges you could face in planning for retirement. In fact, millions of Americans have chosen annuities to help them chart a course toward their long-term financial goals. That s because annuities are long-term insurance investments intended for your retirement planning. Quite simply, annuities are designed to help you accumulate money now in order to create a reliable stream of payments to you in the future, generally during retirement. The ProSaver Index Series Annuity ~ An Opportunity for Growth with Security Indexed annuities are simply fixed annuities that offer new options for interest crediting. The ProSaver Index Series Annuity, for example, provides interest-crediting options tied to the performance of the S&P 500 Index. Depending on the performance of the index, this may provide the opportunity to realize higher interest earnings than other fixed rate alternatives, while avoiding the risk of market losses that can occur with stock market investments. Indexed annuities are not securities or stock market investments. Although indexed annuities may provide opportunities to earn interest linked to the performance of outside stock market indexes (like the S&P 500 Index), they do not participate in any stock or equity investments. Interest Earning Potential Saving and growing your money over time is challenging enough but it s even more difficult when you consider the impact of inflation and taxes. That is why many investment professionals advise us to consider real rates of return the real interest rate after inflation is considered. For example, a fixed rate investment that offers a 5% annual interest rate may sound attractive. But if the inflation rate is 3%, your investment is earning a real return of just 2%. That may cause you to wonder if that will be enough to meet your long-term objectives. Perhaps even more concerning is that in some periods, the rate of inflation can be higher than the returns of various investments meaning that you may actually realize negative real returns. Another challenge is the long-term impact of taxes. Investments that offer tax deferral (like annuities) enable you to keep more of your money earning interest, compared to taxable investments that require you to pay taxes each year. This concept of tax-deferred growth is covered in more detail on page 10. 6

7 Interest Earnings Linked to the S&P 500 Index The S&P 500 Index is one of the most commonly used benchmarks of U.S. equity markets. It is a market capitalization weighted index of 500 of the largest U.S. companies and includes a representative sample of leading companies in leading industries of the U.S. economy. This particular index is based on the stock prices of these companies and does not include dividends. Over long periods of time, the S&P 500 Index has provided average annual returns greater than many other benchmarks, including many fixed rate alternatives. Equally important, it has outpaced the rate of inflation historically. By looking back over the last twenty years, this chart illustrates that point % S&P 500 Index Comparison Average Annual Returns % 4.90% Rate of Inflation (CPI) 2.92% S&P 500 Index 5 yr Treasury 6 month CD Source: Calculated by Protective Life using information and data from Standard & Poor s, the Federal Reserve, and the Bureau of Labor Statistics. 6 month CD rates annualized using bank interest and based on average dealer bid. This chart is illustrative only and is not intended to forecast, imply, or or guarantee the future performance of any investment. Past performance is is no guarantee of of future results. It s important to point out that none of the returns illustrated above are directly applicable to an indexed annuity. However, the opportunity to earn interest that is in part linked to the returns of the S&P 500 Index may represent an attractive long-term opportunity. Keep in mind that the indexed interest is subject to limitations set by the insurance company. In the ProSaver Index Series Annuity you can earn indexed interest in one or more of the index-linked strategies in our Indexed Account. While interest crediting is linked to the performance of the S&P 500 Index, there are limitations set on how much interest will be credited. (We explain these limitations further in The Accounts Reference Guide and the Indexed Annuity Disclosure Statement and Acknowledgement Form.) However, since only the indexed interest rates are dependent on the S&P 500 Index, a decline in the index simply results in no interest being paid, rather than a loss of principal or prior earnings. ProSaver Index Series 7

8 The ProSaver Index Series Annuity ~ How Interest Crediting Works Interest Crediting at a Glance Your ProSaver Index Series Annuity provides two interest-crediting accounts to which you can allocate your contract value each contract year: the Fixed Account and the Indexed Account. Please see The Accounts Reference Guide and the Indexed Annuity Disclosure Statement and Acknowledgement Form for more important information on how interest is credited to the accounts. Fixed Account: This option provides a rate of return that is guaranteed to remain the same until the next contract anniversary. The Fixed Account may not be available in all states. Indexed Account: With the Indexed Account option, you have a choice of three different strategies among which to allocate your purchase payments. All strategies may not be available in all states. Interest Rate Cap Strategy On each contract anniversary, the indexed interest rate applicable to the Interest Rate Cap Strategy for the contract year just ended is equal to 100% of any increase in the S&P 500 Index during the contract year, up to a maximum of the indexed interest rate cap for that contract year. Fixed Rate Plus Strategy This option earns interest daily at a fixed rate. In addition, it offers the potential to earn interest on each contract anniversary based on the performance of the index at a participation rate. Indexed interest is credited each contract anniversary at a rate equal to a specified percentage, called a participation rate, of any increase in the S&P 500 Index during the contract year. Participation Rate Strategy Indexed interest is credited each contract anniversary at a specified participation rate. While both the Fixed Rate Plus and Participation Rate Strategies use a participation rate, the actual participation rates applied to each strategy are different. 8

9 Although it is impossible to predict the future performance of the S&P 500 Index, it is possible to get a picture of how the index has performed in past years. The following chart shows the annual returns for the index over a 20-year period, with indicators of how hypothetical interest crediting approaches may have limited actual interest crediting on an indexed annuity. As you can see, during that period, the S&P 500 Index has experienced several years of significant growth, other periods of notable losses, and still other years in which the index returns were moderate or even flat. Index vs. Strategy Performance Interest Rate 40% 30% 30.65% 26.31% 35.20% 31.01% 26.67% 19.33% 19.53% Interest Rate Cap Strategy Fixed Rate Plus Strategy Participation Rate Strategy 26.38% 20% 10% 2.03% 11.43% 4.46% 7.06% 11.65% 8.99% 4.69% 0% -10% -20% -30% -8.19% -1.57% % % % Interest Rate Cap Strategy 2.03% 7.00% 7.00% 0.00% 7.00% 4.46% 7.00% 0.00% 7.00% 7.00% 7.00% 7.00% 7.00% 0.00% 0.00% 0.00% 7.00% 7.00% 4.69% 7.00% Fixed Rate Plus Strategy 2.61% 5.43% 11.19% 2.00% 9.89% 3.34% 4.12% 2.00% 12.56% 7.80% 11.30% 10.00% 7.86% 2.00% 2.00% 2.00% 9.91% 4.70% 3.41% 5.49% Participation Rate Strategy 1.12% 6.28% 16.86% 0.00% 14.47% 2.46% 3.88% 0.00% 19.36% 10.63% 17.05% 14.67% 10.74% 0.00% 0.00% 0.00% 14.51% 4.95% 2.58% 6.41% Source: Calculated by Protective Life using information and data from Standard & Poor s. This chart is illustrative only and is not intended to forecast, imply, or guarantee the future performance of any investment. Past performance is no guarantee of future results. It does not include the effect of taxes or any charges. Surrender charges may apply to early withdrawals. The S&P 500 Index is a market capitalization weighted index of 500 of the largest U.S. companies (without dividends). It is unmanaged and purchasers cannot invest directly in it. The ProSaver Index Series Annuity is not an investment in the S&P 500 Index. This chart is intended to be used solely as a demonstration of how the ProSaver Index Series Annuity might work. The Interest Rate Cap Strategy assumes an indexed interest rate cap of 7.00% each year. The Fixed Rate Plus Strategy assumes a 2.00% fixed rate and a participation rate of 30% each year. The Participation Rate Strategy assumes a participation rate of 55% each year. All returns are assumed on a calendar basis, with a single purchase payment made on December 31, 1986, with no reallocations, withdrawals, or surrenders. Additional purchase payments and withdrawals or surrenders of contract value would change the results shown. The participation rate and indexed interest rate cap are subject to change each year. ProSaver Index Series

10 The Power of Tax Deferral Income taxes are one of the primary obstacles to accumulating wealth for retirement because they reduce the efficiency of compounding and thus the rate of growth. Annuities provide some control over when income taxes are paid as any earnings grow without taxation until they are withdrawn or distributed, at which time they will be taxed as ordinary income and may be subject to a 10% IRS penalty tax if taken prior to age 59 ½. Tax-deferred accumulation means interest is earned on 1) principal 2) interest, and 3) amounts that otherwise would have been paid in taxes. This increased efficiency may mean greater accumulation over time. The Growth Phase chart below illustrates the impact of tax deferral with a hypothetical $50,000 purchase over a 30-year period, earning a constant 5% annual return (net of any expenses) for both the taxable and taxdeferred purchase. Growth Phase Initial Purchase Payment - $50,000 5% 5% Assumed Assumed Annual Annual Growth Growth $200,000 $100,000 Tax-Deferred Annuity (no taxes illustrated) Tax-Deferred Annuity (after payment of 25% federal income tax on earnings) Taxable Investment (assumes 25% federal income tax rate applied annually to earnings) $174,572 $216,097 $150, Years These charts are for illustrative purposes only and should not be viewed as representative of past, current or future performance of the ProSaver Index Series Annuity. Illustrated rates are neither an estimate nor a guarantee for the future. Actual results may be higher or lower. A portion of the earnings from taxable contracts may be subject to lower maximum tax rates on capital gains and dividends, which may be lower than the income tax rate used to calculate the results in the Growth Phase chart above. Payout Phase Tax-Deferred Annuity 10 $1,500 $1,000 $1,062 monthly payments Taxable Investment

11 $100,000 Taxable Investment (assumes 25% federal income tax rate applied annually to earnings) $150,874 The Payout Phase chart illustrates what happens when you annuitize (convert the value of your annuity into a stream of regular payments) the tax-deferred annuity after the 30-year Years growth phase. The tax-deferred annuity amount of $216,097 is converted into a stream of $1,062 monthly payments, based on a payments for life annuity option for a hypothetical 65-year old male at current annuity rates. Since the taxable contract doesn t have the ability to generate a stream of annuity payments, its accumulated value of $150,874 quickly loses steam if withdrawals of $1,062 are made each month. At that pace it runs out of money after 16 years Payout Phase Tax-Deferred Annuity $1,500 $1,000 $1,062 monthly payments Taxable Investment $ Years In the Payout Phase chart, monthly withdrawals of $1,062 net after tax are made from the taxable investment. The tax-deferred annuity is assumed to have been purchased with after-tax dollars (nonqualified funds), meaning that annuity payments are considered to be part return of principal and part earnings on principal. Only the earnings portion of each annuity payment is taxable until principal is recovered. Therefore, the tax-deferred annuity payout figures are based on gross monthly lifetime annuity payments of $1,417, sufficient to generate $1,062 net after tax with the application of a 25% federal income tax on earnings. An annuity contract may be purchased on a nonqualified basis or for use within certain qualified retirement plans or arrangements that receive favorable tax treatment, such as individual retirement accounts and individual retirement annuities (IRAs), pension and profit-sharing plans (including H.R. 10 Plans), and tax-sheltered annuity plans. Many of these qualified plans, including IRAs, provide the same type of tax deferral as provided by an annuity contract and the annuity contract does not provide any additional tax-deferral benefit. An annuity contract however, does provide a number of other benefits and features not provided by such retirement plans or arrangements alone. Purchasers should consult a qualified tax and/or financial adviser regarding the use of an annuity contract within a qualified plan or in connection with other employee benefit plans or arrangements. ProSaver Index Series 11

12 Additional features of a ProSaver Index Series Annuity Liquidity features The ProSaver Index Series Annuity is a long-term investment intended for retirement planning. However, the liquidity features of the ProSaver Index Series Annuity are designed to provide you with access to your money in case of need. Keep in mind that surrender charges apply during the initial term only. For more information about surrender charges please see the Annuity Reference Guide. During the first contract year, you can withdraw a specified percentage of the initial purchase payment without surrender charge. After the first contract year, you can withdraw a specified percentage of the contract value as of the prior contract anniversary without surrender charge. Withdrawals of earnings will be subject to income tax and may be subject to a 10% IRS penalty tax if taken prior to age 59 ½. Withdrawals will reduce future earnings. Withdrawals in excess of the surrender charge-free-withdrawal amount will be subject to a declining surrender charge during the initial term only. Withdrawals or surrenders from our index-based crediting options prior to the contract anniversary receive no indexed interest for the contract year in which they occur. The ProSaver Index Series Annuity provides a Nursing Home/Terminal Illness Waiver (IPV-2115) that allows you to have access to your contract value without surrender charge if, after the first contract year, you are confined to a nursing home or diagnosed as terminally ill. Not available in all states. State variations may apply. Reallocation of Contract Value You may allocate your purchase payment among the Fixed Account and Indexed Account Strategies. You may reallocate your contract value on each contract anniversary. Please see the Indexed Annuity Disclosure Statement and Acknowledgement Form for more important information about reallocating your contract value. Minimum Accumulated Contract Value A feature of the ProSaver Index Series Annuity that ensures a minimum contract value in certain situations is called the Minimum Accumulated Contract Value (MACV). The MACV is applied only upon full surrender, annuitization (a stream of annuity payments) or at your death. This feature ensures that the value of your annuity (before surrender charges) in these situations will be the greater of Contract Value (including the Fixed Account and Indexed Account) or the MACV. 12

13 Payout features of the ProSaver Index Series Annuity Regular annuity payments that can last a lifetime Annuities have the ability to provide a stream of payments that can last a lifetime, similar in concept to payments received from an old-fashioned pension. These payments can be for life (no matter how long), for a specified period of time, or a combination of both. This benefit is unique to annuities and offers protection from outliving one s assets. It is provided when the value of an annuity contract is converted into a stream of annuity payments. This process is known as annuitization. If the annuity contract was purchased with after-tax dollars (non-qualified funds) then each annuity payment is generally considered to be part return of principal and part earnings on principal. Only the earnings portion of each payment is taxable until principal is recovered. Funds in tax-qualified plans will be taxed according to the rules applicable to such plans. With the ProSaver Index Series Annuity, you have a choice of payment options when you convert your annuity contract into a stream of annuity payments. These include: Certain period: Payments continue for a specific period that you select, ranging from 5-30 years. The payments are not based on the life expectancy of the annuitant. If the annuitant dies before all payments have been made, any remaining payments continue at the direction of the beneficiary. Payments for life: Payments continue as long as the annuitant is alive. Payments stop when the annuitant dies. If the annuitant dies shortly after payments begin, payments stop no matter how much or how little had been paid by the insurance company. Payments for two lives: Payments continue as long as one of two annuitants (often spouses) is alive. Payments for life (or two lives) with a certain period: Payments continue as long as an annuitant is alive, but payments will continue for at least a specific period of time that you select (ranging from 5 to 30 years) whether or not an annuitant is alive. This option ensures that, in the event of the death of the annuitant, payments continue at the direction of the beneficiary until the end of the specified period. State variations may apply. Other options may also be available when you are ready to annuitize. Surrender charges do not apply on annuitization. Please see the Indexed Annuity Disclosure Statement and Acknowledgement Form for more important information about annuity payments. ProSaver Index Series 13

14 Protection features of the ProSaver Index Series Annuity Annuity Value Benefit (IPV 2125) The Annuity Value Benefit, available at no additional charge, rewards contract holders for waiting to convert the value of their annuity contract into a stream of annuity payments. We will increase your annuity value by a specified percentage (based on contract value) if your annuity payments begin after a specified period of time. Please see the Indexed Annuity Disclosure Statement and Acknowledgement Form for more important information about this benefit. In order to qualify for the Annuity Value Benefit, some annuity payment options may not be selected. Death Benefit If you die before converting your annuity into a stream of payments, we will waive any applicable surrender charges and provide your beneficiary the greater of the Contract Value or the Minimum Accumulated Contract Value. Any benefit payable upon death is transferred directly to named beneficiaries, avoiding the cost, delay, and publicity of probate. Income and estate taxes may apply. Please see the Indexed Annuity Disclosure Statement and Acknowledgement Form for more important information about the death benefit. Spousal Continuation Benefit The Spousal Continuation Benefit allows the surviving spouse who is the primary beneficiary to continue the contract rather than taking the death benefit. Please see the Indexed Annuity Disclosure Statement and Acknowledgement Form for important information about this benefit. 14

15 [POCKET]

16 The ProSaver Index Series Annuity can help you build a more comfortable retirement and begin to earn potentially higher interest than other fixed rate alternatives. experience the power of tax deferral to help you potentially accumulate more wealth over time. enjoy your retirement years by receiving a stream of annuity payments that can last a lifetime. The tax treatment of life insurance and annuities is subject to change. Neither Protective Life nor its representatives offer legal or tax advice. Purchasers should consult their attorney or tax adviser regarding their individual situation. The ProSaver Index Series Annuity is issued by Protective Life Insurance Company (PLICO), 2801 Highway 280 South, Birmingham, AL Policy form numbers IPD-2101, 2102, 2111, 2118 (and state variations thereof). A flexible premium deferred fixed and indexed annuity contract. Product features and availability may vary by state. All benefits and payments are subject to the claims paying ability of PLICO. This brochure provides a summary description of the ProSaver Index Series Annuity. The exact terms of the ProSaver Index Series Annuity are contained in the contract and any attached riders and endorsements, which will control PLICO s contractual obligations. S&P 500 is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by Protective Life Insurance Co. The ProSaver Index Series Annuity is not sponsored, endorsed, sold or promoted by Standard & Poor s and Standard & Poor s makes no representation regarding the advisability of investing in the ProSaver Index Series Annuity. PAC /07