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Annuities as an Asset Class for Fee-Based Advisors l 12 © Envestnet 2022 The previous explanation about how an annuity can contribute to a plan was based on the simplest form of an annuity: A life-only income annuity. Now we are ready to step back to describe the broader annuity universe. A fundamental aspect that defines an annuity is that it is a contract which can be annuitized to provide a series of payments from the insurance company, either for life or for a fixed period. However, today there are many annuities that downplay this aspect of annuitization. As the tax code in the United States provides tax-deferral advantages for annuities, other forms of annuities have evolved with a greater emphasis on providing tax- deferred growth for the assets in the annuity with a de-emphasis on their income-generating abilities. As well, more recent developments include optional riders that can be added to annuities to support a lifetime income without having to annuitize the contract. Two broad classifications for annuities exist: fixed and variable. Simply, fixed annuities credit interest to the underlying assets in the annuity at a fixed rate (which can change over time), while variable annuities position the premiums into subaccounts that allow for investments into different funds earning a variable rate of return. Fixed annuities pool assets in the insurance company's general account, while variable annuities hold assets in separate investment subaccounts that are like mutual funds. Since variable annuities behave more like investments, those selling them need to be properly licensed in most states to sell both insurance and investments. This definition about fixed and variable annuities can be confusing. First, income annuities are fixed annuities, but they do not show an underlying account balance to which interest is credited. Rather, the insurance company determines the payout rate based, in part, on the interest it projects to earn on the underlying premiums held in its general account. Second, fixed index annuities can be structured to credit interest based on the performance of a volatile investment index. This can make them sound more like a variable annuity, but technically it is just a matter that fixed interest is being credited based on outcomes for a volatile index. Fixed index annuities provide principal protection, which means that one cannot experience any capital losses from negative market returns. Unlike a variable annuity, fixed index annuities do not provide subaccounts in which investments are made. They only credit interest based on the performance of a linked index. Variable annuities subaccounts can experience loss. Overview of Annuity Types Two broad classifications for annuities exist: fixed and variable Annuities as an Asset Class for Fee-Based Advisors l 12 © Envestnet 2022

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