Understanding Annuities

Transcription

1 Understanding Annuities Annuities issued by Pruco Life Insurance Company (in New York, issued by Pruco Life Insurance Company of New Jersey) and The Prudential Insurance Company of America Ed. 11/2012

2 Meeting the challenges of retirement with today s annuities You may be faced with unprecedented challenges when it comes to preparing for retirement. With the future of Social Security uncertain and traditional employer pension plans becoming a luxury of the past, the burden of financing retirement is now falling on the shoulders of individuals. As a result, planning has become even more critical. If you re concerned about having enough money to live the lifestyle you ve been envisioning for retirement, an annuity could help. There are several different types of annuities to help meet your individual needs and objectives. And in response to the changing needs of retirees and ongoing market volatility, today s annuities have new innovative features called optional living benefits. Available for an additional fee, living benefits can provide lifetime income guarantees with added protection and flexibility. It is worth taking a fresh look with your financial professional to see how today s annuities can play a role in your retirement income plan. 2/ 16

3 table of contents What is an annuity?. 4 An annuity is a contract between you and an insurance company. An annuity gives you an opportunity to invest in order to help supplement your assets with a guaranteed stream of income you can t outlive. Different types of annuities for different needs. 5 You can choose from several different types of annuities to help meet your retirement income needs. How annuities work. 6 Annuities have two phases: accumulation and distribution. How much does an annuity cost? Fees and expenses will vary depending on the type of product and any optional benefits you may elect. For a variable annuity, see the product prospectus for costs of the annuity and other optional costs. For a fixed annuity, refer to the annuity s supporting sales material or speak with your financial professional. When you are ready to take income. 8 You have options when it comes time to take income from your annuity. Invest with Guarantees * with variable annuities Today s variable annuities have optional benefits that lock in highs to protect your income base from market volatility and can help you enjoy guaranteed retirement income for life. Types of optional Guaranteed Living Benefits (GLBs). 10 Most variable annuities offer you the opportunity, at an additional cost, to add an optional living benefit to your contract. Death benefits. 11 Most annuities offer a basic death benefit for your beneficiaries. Many variable annuities also offer optional death benefits for an additional fee. Tax advantages of an annuity. 12 Tax deferral can help ensure your retirement dollars are working harder for you over a longer period of time. The strength of the issuing company. 14 Annuity guarantees are backed by the claims-paying ability of the issuing company, so you should consider the issuer s financial strength when purchasing an annuity. What else should you know before you buy?. 14 Learn as much as you can about the particular annuity you have in mind. In addition to speaking with your financial professional, you should carefully read the product s supporting sales material, and, if applicable, the variable annuity prospectus and fund prospectuses. Glossary. 15 The terminology and language of annuities. * Invest with Guarantees is a registered service mark of The Prudential Insurance Company of America and its affiliates. 3/ 16

4 What is an annuity? An annuity is a contract between you and an insurance company that guarantees to pay you a stream of income at some future date. You determine whether your payments will be of a specific amount or for a certain period of time or for the rest of your life. Annuities are appropriate for long-term saving and are designed for retirement purposes. They are generally not suitable for shorter-term financial goals. You can own an annuity in your own name or jointly with your spouse or another person. The owner designates an annuitant, the person whose life determines the amount of annuity income payments to be paid under the annuity contract. Typically, the owner and annuitant are one and the same. You can purchase an annuity contract by making either a single payment or a series of payments. Often there are no contribution limits with an annuity; in such cases you can add as much money as often as you want within the guidelines of the product you ve chosen.* All the guarantees of an annuity are backed by the claims-paying ability of the issuing insurance company. *For qualified annuity contracts, certain limitations may apply. 4/ 16

5 Different types of annuities for different needs You can choose from several different types of annuities to help meet your individual needs and objectives. Your financial professional can help you determine which type of annuity may be right for you. Annuities can be categorized in two different ways. First, an annuity may be either immediate or deferred. Second, an annuity may be either fixed or variable. Immediate Annuities allow you to start taking income sooner rather than later. This type of annuity is purchased with a single lump-sum payment and you must begin receiving income payments within 12 months. You choose the payout period and the payments are calculated based on the option that you choose. Your financial professional can assist you in choosing among the options to help you receive the monthly annuity income payments you want. Deferred Annuities allow you to accumulate money on a tax-deferred basis and, depending upon your age and if the money is qualified or non-qualified, they may allow you to delay receiving payments until you re ready to start taking income for retirement. You can withdraw income as needed, or you can set up a regular stream of annuity income payments that can last for life or over a given time period. You can purchase a deferred annuity by making either a single payment or a series of payments. Fixed Annuities may be an appropriate way to save for retirement if you re not all that comfortable taking investment risks. Fixed annuities guarantee a specified rate of return (less any surrender charge, if applicable) for a specified period of time or for life. Depending on the terms of the contract, the issuing insurance company may adjust the rate periodically. Some annuities also offer a Market Value Adjustment option. In general, fixed annuities have lower fees than variable annuities and are considered less volatile. An equity-indexed 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. The value of the index might be tied to a stock or other equity index. The value of any index varies from day to day and is not predictable. Equity-indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked. The guaranteed account value of a market value adjusted annuity and an equity-indexed annuity applies only if the annuity is held until the end of the guaranteed or contract term and loss of principal is possible if the annuity is surrendered before the end of the specified period. Variable Annuities are designed for people willing to take more risk with their money in exchange for greater growth potential. A variable annuity is a hybrid of an investment product and an insurance product. The investment aspect of a variable annuity is derived primarily from the fact that variable annuities invest in subaccounts. These subaccounts make their shares available only to variable insurance products (and in certain cases, qualified retirement plans) and usually fluctuate in value each business day. The insurance element of a variable annuity refers to the features of the annuity that are typical of the kinds of benefits offered by life insurance companies. These include the payment of a death benefit and providing the annuity owner with the contractual right to annuitize the accumulated value under the annuity. In addition to those basic insurance features, many variable annuities today offer optional features called living benefits that are consistent with the kinds of benefits offered by life insurance companies. For example, for an additional fee, some insurance companies offer a guaranteed minimum withdrawal benefit (GMWB), under which the insurer guarantees that the variable annuity owner can withdraw a specified dollar amount from the annuity despite declines in the actual market value of the annuity. In general, you incur a fee for any insurance benefit under the variable annuity. Thus, before you buy the annuity, you should decide whether the benefit (or benefits) you are considering are worth the cost. Please see pages 10 and 11 for descriptions of certain optional benefits offered with variable annuities. Some insurance companies offer variable annuity contracts with a purchase credit feature. These contracts promise to add a purchase credit value to your annuity based on a specified percentage of the initial purchase payments. Variable contracts with purchase credits may have higher fees and expenses and a longer surrender charge period than other similar annuities without a purchase credit. The purchase credit may only apply to your initial payment or to payments that you make in the first year of the contract. You may also lose the purchase credit under some circumstances such as if you make a withdrawal, free-look the contract or a death occurs within a specified time. Over time, the higher expenses could be more than the value of the credits. Carefully consider the expenses along with the features to be sure this type of annuity meets your financial needs. The preceding is a very general description of annuities. Before buying an annuity, it is important to find out more about the specific features, terms and costs of the annuity you are considering. For more information, please refer to the annuity s supporting sales material, and if it is a variable annuity, the product prospectus. The prospectus contains important information about the annuity contract such as investment options, fees and charges, living benefit options, death benefits and payout options. 5/ 16

6 How annuities work Annuities have two phases: the accumulation phase and the distribution phase. The accumulation phase starts as soon as you make your initial purchase payment. The distribution phase begins as soon as you, or you and your spouse, start receiving income payments, usually at retirement. Upon the annuity owner s death, the surviving spouse, if he or she is the sole beneficiary, may be able to continue the annuity contract. The Accumulation PhasE During the accumulation phase: A fixed annuity will earn a specified interest rate and generate a guaranteed stream of income at some future date. A variable annuity guarantees future income, but your account value will fluctuate due to the performance of the subaccounts you select. Taxes on any earnings from your annuity will be deferred until you begin to withdraw funds, so your savings have the potential to grow faster than a currently taxable investment earning a similar return. Annuities typically allow you to take a partial withdrawal of up to 10% of purchase payments each year without surrender charges if you need to access your money during the accumulation phase. But you may be charged a surrender charge if you withdraw more than the 10% penalty-free amount during the surrender charge period. If you cancel your annuity during the early years of the contract or withdraw more than your permitted amount, there will usually be a surrender charge. A surrender charge is a fee you will pay if you cancel your annuity contract, or withdraw more than your permitted amount, within a specified surrender period. A surrender charge period is typically zero to 10 years, but can be longer. The surrender charge is a descending fee that generally is reduced by one percent each year for a specified period of time. The surrender charge can be based on the annuity s issue date or effective date of purchase and is also referred to as a Contingent Deferred Sales Charge (CDSC). The Distribution Phase When you re ready to start taking income, an annuity offers a choice of distribution options to help you meet your individual needs and retirement objectives. You can withdraw your money all at once (subject to surrender charges) or at periodic intervals. Or, through annuitization, you can exchange the accumulated value of your annuity for one of several payout options that guarantee your money will last as long as you need it, which can be used for retirement income you can t outlive. You should consider your options carefully, because your decision to annuitize is irrevocable and your payout option generally cannot be changed in the future. You can choose to receive income payments that will continue for the remainder of your life. Income ceases upon your death. A joint-life option guarantees income payments for the lifetime of two annuitants (for example, a husband and wife). Or you can receive income for a specific time period, such as 5, 10 or 20 years. The amount of each payment will depend on your contract value and the time period you choose. Most annuities feature a guaranteed death benefit. If you should die during the accumulation phase, the issuing company will return the amount of your original purchase, less any withdrawals you ve made, to your beneficiary, even if your annuity may have declined in value. This death benefit passes outside of probate, although estate and income taxes may apply. Many annuities also offer optional death benefits that can provide an enhanced legacy for your beneficiaries for an additional cost. 6/ 16

7 How much does an annuity cost? There are several possible fees and expenses associated with owning an annuity. These charges are designed to cover costs of selling, administering and providing benefits under the contract. The product prospectus that you ll receive before you make a variable annuity purchase decision itemizes each annuity cost, so you can clearly see how much you ll be paying for all the benefits and guarantees. For fixed annuities, the annuity s supporting sales materials should include these costs. When the issuing company sets the interest rate to be credited to a fixed annuity contract, it usually considers not only the prevailing market rates, but also the costs of issuing and maintaining the annuity contract. Generally, fixed annuity expenses cover sales commissions, statements and customer service. The most common annuity fees and expenses include the following: Annual maintenance fee This is charged as a flat fee and/or as a percentage of your account value. Some insurance companies waive this fee on larger account values. Mortality and Expense (M&E) risk charge This charge, which is a percentage of the daily net assets of the subaccounts of your variable annuity, compensates the insurance company for providing insurance benefits under the annuity contract. Administrative fees For a variable annuity, this fee is charged as a percentage of the daily net assets of your subaccounts and is charged in part to cover administrative costs associated with providing the annuity benefits. These include preparation of the contract and prospectus, confirmation statements, annual account statements and annual reports, and legal and accounting fees as well as various other related expenses. Underlying fund expenses These are fees and expenses associated with a variable annuity s subaccounts. Each subaccount incurs total annual operating expenses comprised of an investment management fee, any distribution and service (12b-1) fees, and other expenses that may apply. Surrender charges If you withdraw money from a fixed or variable annuity within a specified period after a purchase payment or issue date, the insurance company usually will assess a surrender charge, which generally is a percentage of the purchase payment being withdrawn that declines gradually over a period of several years. Some contracts may allow you to withdraw part of your account value each year 10% of purchase payments, for example without paying a surrender charge. The applicability of surrender charges depends on the type of annuity you choose. Some companies may refer to this as the contingent deferred sales charge (CDSC). Other fees and charges Certain guarantees offered by some variable annuities, such as an optional living benefit or an optional death benefit, usually have additional fees and expenses. These charges will reduce the annuity s account value. You should ask your financial professional to explain all charges that apply to the annuity and any optional features you re considering so that you can understand the costs. 7/ 16

8 When you are ready to take income Lifetime Income and Annuitization You can also choose to receive lifetime income with a minimum number of annuity income payments guaranteed. This option will guarantee annuity income payments for your lifetime. If you die before the minimum number of income payments have been paid, your beneficiary will receive income payments for the remainder of the guaranteed period. You may also have a choice of fixed or variable annuitization. With fixed annuitization, the income amount is traditionally a set dollar value. Some contracts build in the potential for periodic increases to account for cost of living increases. With variable annuitization, you can choose to receive variable income, which fluctuates depending on the performance of your subaccounts, or some combination of fixed and variable income, which offers both stability and the potential for growth. Living Benefits Some annuities let you lock in a guaranteed amount for each income payment. The number of payments you receive is based on several factors including your contract value and the income payment option you choose. There s another payout option available on certain variable annuities that offers even greater flexibility. If you want guaranteed lifetime income, but don t want to give up control of your assets by annuitizing your contract, ask your financial professional whether adding a living benefit to your variable annuity, for an additional cost, is appropriate for your needs. You have choices when you re ready to take income from your annuity. FPO Photo 8/ 16

9 Invest with Guarantees with variable annuities The increasing popularity of variable annuities is largely due to new, innovative optional features called living benefits that allow you to invest with guarantees and insure your retirement income. Conventional wisdom says that long-term investing in equities should give you the best chance of achieving your retirement goals. But a critical challenge for many people today is to stay on track with their investment strategies during periods of market volatility. This is especially true if you re in The Retirement Red Zone * the critical planning years when you look to turn your savings into income that can last a lifetime because there may not be enough time to recover from poor earnings performance. Some people in this situation may be prone to making investment decisions that can have unfortunate results over the long term. In addition to basic insurance features (such as the payout of a death benefit and the contractual right to annuitize), many variable annuities today offer optional living benefits. For example, for an additional fee, some insurance companies can offer a guarantee that captures increases in your annuity during a well-performing market, and protects it against losses during market downturns. The guaranteed lifetime income of an optional living benefit like this is based on a protected withdrawal value and not the annuity s account value. The Protected Withdrawal Value is the value that is locked in and protected from market downturns. You cannot access the Protected Withdrawal Value outside of the benefit and you cannot withdraw it as a lump sum. The annuity account value is the value of your variable annuity s underlying subaccounts. The account value fluctuates daily due to market changes. Depending upon your annuity s restrictions, you may be able to withdraw your account value as a lump sum. Certain other limitations may apply. See the product prospectus for more details. In general, you incur an additional fee for any optional benefit under the variable annuity. Thus, before you buy the annuity, you should decide whether the benefit (or benefits) you are considering is worth the cost. WHAT IT TAKES TO RECOVER FROM A MARKET DOWNTURN $350,000 $300,000 12% 10% -19% How long and how much would it take to recover? # Years Average annual return 1 45% VALUE $250,000-15% 2 21% 3 13% 4 10% $200, % $150, Retirement Countdown (Years) Intended Retirement What would it take to recover from a market downturn as you get close to retirement? This chart shows that if your investment portfolio suffered two years of negative performance (-19% and -15%, respectively) during the five years immediately prior to retiring, it would take a very unlikely 45% return in the following year to fully recover your principal and investment gains. This chart is hypothetical and one example of the returns an investor theoretically could experience during a given period, and is not intended to depict past or future performance of a variable annuity or subaccount within a variable annuity. If this were an actual example, various costs would be factored into the gross return, including annual insurance and administrative charges of the annuity, annual contract charges, investment management fees of the variable subaccounts, the cost for any optional features, and any other applicable fees. * The Retirement Red Zone is a registered service mark of The Prudential Insurance Company of America and its affiliates. 9/ 16

10 Types of optional guaranteed living benefits (GLBs) Variable annuities may offer you the opportunity, at an additional cost, to add an optional Guaranteed Living Benefit (GLB) to your contract. Since the GLB is optional, you are able to select and pay only for the benefit you need. The GLB you select will determine the amount of the charges for the benefit and how the charges are deducted from your contract. For example, a GLB may assess the charge for the benefit against the greater of the account value and the protected withdrawal value (which may be adjusted for withdrawals and purchase payments). Because of the different ways the charge will be assessed, it is important that you speak with your financial professional in addition to reading the variable annuity prospectus concerning the specific GLBs you may be considering. Guaranteed Flexible Living Benefit Offers upside market opportunity with downside protection for you and/or your spouse s retirement income. May provide compounded growth on the variable annuity s highest account value at specific intervals, such as on an annual, quarterly or even daily basis. Also guarantees a minimum level of income payments for life. Guaranteed Minimum Account Balance (GMAB) This benefit guarantees that your account value will be equal to some percentage (typically 100%) of purchase payments less withdrawals, at a specified future date (i.e., maturity). Guaranteed Minimum Income Benefit (GMIB) This benefit allows you to receive lifetime income based on a guaranteed amount and annuity rates specified within the benefit, at or after the specified waiting period. You must choose to annuitize after the benefit waiting period in order to utilize the benefit. Guaranteed Minimum Withdrawal Benefit (GMWB Non-Lifetime) Guarantees that you can make withdrawals, subject to a specified maximum per year (any excess above the withdrawal amount under the benefit will reduce the protected annual withdrawal amount), which will equal at least a certain minimum regardless of market performance. You are not entitled to Lifetime Withdrawals under this benefit. Guaranteed Lifetime Withdrawal Benefit (GMWB Lifetime) Guarantees that you can make withdrawals, subject to a specified maximum per year, that will equal at least a certain minimum (e.g., premiums paid less withdrawals) or for life. Typically this benefit has no waiting period. Note: Withdrawals in excess of applicable maximum withdrawal amount may reduce the remaining benefit base and the maximum annual withdrawal amount proportionally. In some cases, excess withdrawals may cause you to lose the benefit. You should refer to the prospectus for additional information on the effect of withdrawals. 10/ 16

11 Death benefits Most annuities offer a basic death benefit for your beneficiaries. This way, if you were to pass away before you annuitize, your loved ones are guaranteed to receive a specified amount typically at least the total amount of purchase payments, less an adjustment for any withdrawals. Basic Annuity Death Benefit The basic death benefit under a variable annuity is typically equal to the greater of: The sum of all purchase payments (not including any purchase credits) less the sum of all proportional withdrawals (or some annuities offer a dollar-for-dollar reduction). The sum of the account value in the subaccounts and the fixed rate options (less the amount of any purchase credits applied within 12 months prior to the date of death). Please note that purchase credits are not recaptured in all states and different companies have different recapture policies. The basic death benefit under a fixed annuity typically is: Equal to 100% of the contract s account value less any withdrawals and surrender charges. Many variable annuities also offer optional enhanced death benefits, for an additional fee, that can help protect your legacy from market downturns. They provide additional guarantees for the death benefit amount paid to beneficiaries. Please note that withdrawals can reduce the living benefit, death benefit and account values. Because there are so many different living and death benefit options available today, all backed by the claims-paying ability of the issuing company, it s important that you work closely with your financial professional to see which ones may be right for you. Note: These descriptions are not intended to capture all the terms, conditions and limitations found in the most common types of living and death benefits. Some or all of these benefits may or may not be available with the new annuity you are considering. Complete information is contained in the product s supporting sales materials or product prospectus. You should read the appropriate documents carefully before electing an optional benefit. Medically related surrenders Surrenders may be available without a surrender charge if the annuitant becomes terminally ill or is confined to a medical care facility for over 90 days. Medically related surrenders are available where permitted by law and are subject to the provisions in the annuity. 11/ 16

12 Tax advantages of an annuity One of the major advantages of an annuity is tax-deferred growth potential. You pay no taxes on your earnings until you take withdrawals. Tax deferral is an important aspect of an annuity, since more money stays invested that otherwise would have been paid out in taxes. Over time, any investment gains will be able to compound, potentially generating earnings from previous earnings. And the longer you hold onto your annuity, the greater the impact tax deferral can have on your assets. The chart (below) illustrates just how effective tax deferral can be. A hypothetical $100,000 investment compounded at 8% annually over 30 years grows to $1,006,266 with taxes deferred. Once taxes are paid on the lump-sum distribution, the amount received is $707,198, which is still much more than the $478,931 earned on a taxable investment over the same time frame. THE POWER OF TAX DEFERRAL DOLLARS (000 s) $1,000 $800 $600 $400 $1,006,266 Tax-Deferred Investment $707,198 $478,931 Taxable Investment $200 Years Assumes hypothetical $100,000 invested year one at 8%, 33% ordinary income tax assessed yearly on taxable investments and at period end on tax-deferred investments. Actual tax rates may vary for different assets and taxpayers (e.g., capital gains and qualified dividend income) from that illustrated. Actual performance of your investment will also vary. Hypothetical returns are not guaranteed and do not represent performance of any particular investment. Hypothetical returns do not include withdrawal charges, mortality and expense risk charges, administrative fees, or other contract charges, which would reduce performance if they were included. If a withdrawal or distribution is taken before age 59½, a 10% federal tax penalty may apply. This is a hypothetical example for illustrative purposes only. It does not reflect a specific annuity, an actual account value or the performance of any investment. Tax-deferred variable annuities allow you to transfer your money from one subaccount to another within the annuity without paying taxes on your income and gains. That s not the case with taxable investments, where moving your money from one investment to another is treated as a sale and any gains are taxed at that time. Tax-free transfers make it easier and more convenient to revise your investment strategy as needed without worrying about losing some of your earnings to taxes and without having to surrender your contract. Some transfer limits, however, may apply. 12/ 16

13 There are other tax issues to consider before you purchase an annuity: Annuitized payments are considered part taxable income and part return on investment. Distributions are generally taxed as ordinary income and do not get the benefit of the lower tax rates received by certain capital gains and dividends under current tax laws. Lump-sum withdrawals are subject to the largest tax liability, whereas a systematic withdrawal program lets the rest of your annuity s value continue to grow tax-deferred. Withdrawals and distributions of taxable amounts, if made prior to age 59½, may be subject to an additional 10% federal income tax penalty in addition to your normal income tax. For tax purposes, withdrawals are deemed to be investment gains out first followed by a return of principal. Also, the death of an annuity owner and, in some cases, the death of an annuitant may result in taxable distributions that must be made from the contract within a specified period of time. Upon the death of the owner or annuitant: Gains may be taxable to the beneficiary. Annuity assets may be included in the owner s estate for tax purposes. Annuity assets may avoid the delays of probate, unless the annuity owner s estate is the named beneficiary or no beneficiary is named. Qualified and non-qualified funding of annuities You can also acquire an annuity as part of an IRA, 401(k) or other tax-advantaged plan, which allows you to save on a pre-tax basis. However, keep in mind that an annuity provides no additional tax benefit if the contract is held in a tax-qualified plan. So you should consider an annuity for an IRA, 401(k), etc., only on the basis of its other benefits, such as lifetime income payments and guaranteed living and death benefit options. When an annuity is purchased with pre-tax money, such as an IRA rollover, 401(k) or 403(b), it s known as a qualified annuity. Qualified money already has tax-deferred status; when invested into an annuity, it can be used to create a guaranteed stream of income payments, provide a death benefit, and provide other optional features available in an annuity. Certain qualified retirement plans permit a deduction for the amount contributed to the plan. Generally, the contributions cannot exceed a maximum percent of taxable income, or a dollar amount, whichever is less. When an annuity is purchased with after-tax money, such as an inheritance, a bonus or non-qualified deferred compensation, it s known as a non-qualified annuity. Both grow tax deferred. However, if the annuity has a qualified tax status, the IRS requires that you begin taking minimum distribution withdrawals at age 70½. For annuities held in a Roth IRA, there are no required minimum distributions (RMDs) during the owner s lifetime. 13/ 16

14 The strength of the issuing company An important consideration when buying an annuity is the stability and financial strength of the issuing company. You need to know whether the company is going to be there when you need it. Annuity guarantees are backed solely by the claims-paying ability of the issuing company. So you ll want some assurance that the company providing the guarantees is strong and stable and that the company will likely be around when you need it. Several independent ratings agencies evaluate the financial strength of insurance companies. The rating for an individual company is an opinion as to its financial strength and ability to pay claims (including guaranteed benefits) in the future. Before you make your purchasing decision, be sure to ask your financial professional about the reputation and financial strength of the company behind the guarantees. What kind of experience does the company have issuing annuity products and meeting its financial obligations? What s the company s track record for delivering customer satisfaction? Please note that while all guarantees are based on the financial strength of the issuing company, if you purchase a variable annuity, there is no guarantee on investment performance of the underlying variable subaccounts. What else should you know before you buy? Be an informed consumer. Learn as much as you can about the specific annuity you re considering and compare its benefits and costs to those of other retirement products. If you are considering an annuity, your financial professional will provide you with a prospectus and other supporting sales materials. It s important to review these materials as they contain important information about the annuity s risks, fees and expenses, as well as the payout options, availability of living and death benefits and more. Be sure you can answer the following questions satisfactorily before you purchase an annuity: Are you taking full advantage of all your other tax-deferred opportunities, such as 401(k)s, 403(b)s and IRAs? Will you use the annuity to save for retirement or a similar long-term goal? What is your investment objective, risk tolerance, and investment time horizon? Will the annuity help address your retirement income needs? Are you investing in the annuity through a retirement plan or IRA? Are there features and benefits in the annuity contract, other than tax deferral, that make an annuity purchase appropriate? Do you understand the features of the annuity? Do you understand all of the annuity s fees and expenses? Do you intend to keep your money in the annuity long enough to avoid paying any surrender charges if you have to withdraw money? Have you consulted a tax advisor and considered all the tax consequences of purchasing an annuity, including the effect of annuity payments on your tax status or the effect of death benefit payments to your beneficiaries? 14/ 16

15 Glossary Annuities use terminology with which you may not be familiar. To help you understand the language of annuities, words appearing in bold throughout this guide are explained here. Annuitant The person, usually the contract owner, entitled to receive annuity benefits. The annuitant s life expectancy is used to calculate the annuity s income payment amount. Annuitization The act of annuitizing that is, surrendering an annuity s accumulated value in exchange for guaranteed income payments, either for life or for a specified number of years. Annuitization contractually ends an annuity s accumulation phase. Death benefit The amount paid to a beneficiary upon the death of the annuitant or contract owner, as determined by the applicable annuity contract. Typically, there s a basic death benefit included in the annuity contract, as well as a choice of enhanced death benefits that you can elect for an additional fee. Effective date of purchase The date funds are credited to the annuity contract. Free-look period A specified number of days (e.g., 10) during which an annuity contract holder may rescind the contract purchase. Investment objective How you seek to have your investments achieve your anticipated investment goals. Investment risk The potential to lose money by investing in stocks, bonds and other securities. In general, the higher the potential return, the higher the level of risk involved. Investment time horizon The period of time an investor expects to be able to grow an investment before needing the invested money. The length of time may influence the investment objective, risk tolerance and the investment strategy. Issue date The date an annuity contract becomes effective. Living benefit An optional feature, available at an additional cost, that provides specific income, withdrawal and/or accumulation guarantees, which further protect individuals against downside investment risk. Market value adjustment (MVA) This feature, which is included in some annuity contracts, imposes a positive or negative adjustment if you prematurely surrender your fixed annuity or the fixed subaccount of your variable annuity. Prospectus A legal document filed with the Securities and Exchange Commission that provides detailed information about a variable annuity contract and its investment options. Purchase credit A credit added to your variable annuity contract value based on a specified percentage (usually 2% to 6%) of the initial purchase payment. A variable annuity with a purchase credit feature usually has higher fees and expenses, as well as a higher and longer surrender charge period. Purchase payment The amount of money paid to the annuity issuer in exchange for the rights, privileges and benefits outlined in the annuity. Risk tolerance Your comfort level with regard to the risk of fluctuations in the value of your investment. Subaccounts The portfolios in which purchase payments and any gains on those purchase payments are invested. You choose which subaccounts you want your money invested in and how much you want to allocate to each. Supporting sales material Literature created by the insurance company that provides information about the annuity and its features. Surrender charge or Contingent Deferred Sales Charge (CDSC) The cost to a contract owner for early redemption of the contract or withdrawing money before the end of the surrender charge period. This charge typically is represented as a percentage and decreases to zero over time. Surrender charge period A time period that is specified in the contract and is usually the first 10 years from either the issue date or the effective date of purchase, but can be longer or shorter. 15/ 16

16 Investors should consider the features of the contract and the underlying portfolios investment objectives, policies, management, risks, charges and expenses carefully before investing. This and other important information is contained in the prospectus, which can be obtained from your financial professional. Please read the prospectus carefully before investing. Issuing companies are located in Newark, NJ. Variable annuities are distributed by Prudential Annuities Distributors, Inc., Shelton, CT. All are Prudential Financial companies and each is solely responsible for its own financial condition and contractual obligations. Prudential Annuities is a business of Prudential Financial, Inc. This material was prepared to support the marketing of fixed and variable annuities. Prudential, its affiliates, its distributors and their respective representatives do not provide tax, accounting or legal advice. Any tax statements contained herein were not intended to be used for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your own advisor as to any tax or legal statements made herein. A variable annuity is a long-term investment designed for retirement purposes. Investment returns and the principal value of an investment will fluctuate so that an investor s units, when redeemed, may be worth more or less than the original investment. Withdrawals or surrenders may be subject to contingent deferred sales charges. Withdrawals and distributions of taxable amounts are subject to ordinary income tax and, if made prior to age 59½, may be subject to an additional 10% federal income tax penalty. Withdrawals, other than from IRAs or employer retirement plans, are deemed to be gains out first for tax purposes. Withdrawals reduce the account value and the living and death benefits. Annuity contracts contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Your licensed financial professional can provide you with costs and complete details. Your needs and suitability of annuity products and benefits should be carefully considered before investing. The benefit payment obligations arising under the annuity contract guarantees, rider guarantees, or optional benefits and any fixed account crediting rates or annuity payout rates are backed by the claims-paying ability of the issuing insurance company. Those payments and the responsibility to make them are not the obligations of the third party broker/dealer from which this annuity is purchased or any of its affiliates. They are also not obligations of any affiliates of the issuing insurance company. None of them guarantees the claims-paying ability of the issuing insurance company. All guarantees, including optional benefits, do not apply to the underlying investment options. Optional benefits have certain investment, holding period, liquidity and withdrawal limitations and restrictions. Optional living and death benefits may not be available in every state and may not be elected in conjunction with certain optional benefits. The fees are in addition to fees and charges associated with the basic annuity Prudential Annuities, Prudential, the Prudential logo, the Rock symbol, Bring Your Challenges and The Retirement Red Zone are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide. one corporate drive shelton, connecticut ORD Ed. 11/2012 [WO# ]