Vanguard Lifetime Income Program - SPIA

The Vanguard Lifetime Income Program is a Single Premium Immediate Annuity (SPIA) offering both fixed and variable immediate annuities. The SPIA is offered by the AIG insurance company, According to the prospectus: "The single premium immediate variable annuity Contract described in this prospectus provides annuity payments to the Annuitant for his or her life, and, under particular options, the life of a Joint Annuitant or for a certain period of years. You may select from a number of annuity payment options. Certain options provide a guaranteed minimum number of years of annuity income. You may choose annuity payments that are fixed, variable, or a combination of fixed and variable. You may choose annuity payments on a monthly, quarterly, semi-annual, or annual basis. The Contract is intended for people who want to receive a stream of income payments, generally for retirement but also for other long-term purposes." Fixed income payouts are funded from the insurer's general account and are subject to the continued solvency of the insurer. Variable income payments are funded through the Separate Account.

Minimum Investment
You can purchase the Vanguard Lifetime Income Program annuity contract with a minimum of $20,000 using one of the following methods:


 * With a check. If you prefer, you can wire the money directly from your bank account.
 * With Vanguard mutual fund assets. You can have Vanguard redeem your Vanguard mutual fund shares and apply them to your purchase amount.
 * With a rollover. You can roll over money from an employer-sponsored retirement plan, such as a 401(k) plan, directly into the Vanguard Lifetime Income Program.
 * With an asset transfer. You can transfer assets tax-free from a traditional IRA, or a Roth IRA directly into the Vanguard Lifetime Income Program.
 * With a 1035 exchange. You can transfer nonqualified (after-tax) assets tax-free from an existing annuity into the Vanguard Lifetime Income Program.

The age limit for annuitization is 90 years old.

Investment Options - Fixed Options
All fixed options of the Lifetime Income Program SPIA are funded from the AIG general account and are backed by the claims paying solvency of the insurer. There are three fixed options available:
 * Fixed: The fixed option provides for a constant level payout of income for the term of the annuity. The fixed option provides for the highest level of initial income, but is fixed, and subject to erosion by inflation.
 * Graded: Graded options allow you to select a targeted annual appreciation of income (from 1% to 5%). These increases allow one to partially offset inflation. The initial income from a graded option will be lower than for a fixed option.
 * Inflation Indexed: The inflation index option allows you to link payouts to the CPI-U inflation index. Income adjustments will be made annually and operate similar to an inflation-indexed treasury securityor an I bond. When CPI-U moves upward, the annual adjustment will increase your payment amount and there is no limitation on the annual increase; however, any decrease will never reduce the payment below the initial benefit amount. Because of this guaranteed minimum payment level, any negative movements in CPI which are not applied to the annuity payment amount will be used to offset future CPI increases. For the first annual increase paid, a prorated adjustment will be made based on the number of modal annuity payments made in the previous year. Your initial income payment for the inflation indexed option will be lower than from the fixed option.
 * Medical Underwriting: If you have a medical condition(/s) that may reduce your life expectancy you may qualify for a "rated age". A rated age is older than your actual age and based on your personal life expectancy as determined by a medical underwriter. A rated age applicant can either increase their income payments or reduce the premium amount needed to generate specific payment amounts.

Investment Options - Variable Option
The following subaccounts are available to both non-qualified and qualified immediate variable annuity investors:

The following subaccounts are only available to qualified immediate variable annuities.

Annuitization Options
The Lifetime Income Program SPIA provides for the following annuitization payout options:
 * Single life only. As the annuitant, you receive regular income payments for your lifetime, ending at your death. (Payments are largest with this option.)
 *  Single life with a guaranteed number of years. As the annuitant, you receive payments as long as you live, but not less than a guaranteed period. If you die before the period ends, your beneficiaries receive the remaining payments. The guaranteed period covers 5 to 50 years for nonqualified (after-tax) assets and up to your life expectancy for qualified (pre-tax) assets.
 * Single life with installment refund. As the annuitant, you receive fixed payments for your lifetime. If you die and the sum of the income payments you’ve received is less than your purchase premium, your beneficiaries will receive the difference through monthly payments. This is available only if you choose to receive fixed income payments.
 * Single life with full cash refund. As the annuitant,you receive fixed payments for your lifetime. If you die and the sum of the income payments you've received is less than your purchase premium, your beneficiaries receive a lump-sum refund of the difference. This is available only if you choose to receive fixed income payments.
 * Joint and survivor life only. Payments are made as long as you (the annuitant) or another person (the joint annuitant), such as your spouse, are living. The amount of the remaining annuity payments will be a percentage (50%, 66.67%, 75% or 100%) of the amount that was payable while the annuitant was alive.
 * Joint and survivor with a guaranteed number of years. Payments are made as long as you (the annuitant) or another person (the joint annuitant) are living, but not less than a guaranteed period. If both you and the joint annuitant die before the period ends, your beneficiaries receive the remaining payments. The guaranteed period covers 5 to 50 years for nonqualified (after-tax) assets and up to your life expectancy for qualified (pre-tax) assets.
 *  Joint & Survivor with installment refund. Payments are made as long as you (the annuitant) or another person (the joint annuitant) are living. If both you and the joint annuitant die and the sum of the income payments you’ve received is less than your purchase premium, your beneficiaries will receive the difference through monthly payments. This is available only if you choose to receive fixed income payments.
 * Joint & Survivor with full cash refund. Payments are made as long as you (the annuitant) or another person (the joint annuitant) are living. If both you and the joint annuitant die and the sum of the income payments you’ve received is less than your purchase premium, your beneficiaries receive a lump-sum refund of the difference. This is available only if you choose to receive fixed income payments.
 * Guaranteed number of years only. As the annuitant, you receive fixed payments for a guaranteed number of years (5 to 50 years for nonqualified (after-tax) assets and up to your life expectancy for qualified (pre-tax) assets). If you die before this period ends, your beneficiaries receive the remaining payments. Payments end when the guaranteed period ends, whether or not you or your beneficiaries are still living. This is available only if you choose to receive fixed income payments.

Expenses
Fixed immediate annuity options do not have expense ratios; costs are embedded in the income quote one receives from the insurer. The Lifetime Income Program's variable immediate options have the following expenses:
 * Mortality and Expense Risk Charge: 0.52%
 * Subaccount Expense Ratios: 0.14% to 0.42%
 * Transfer Fees: After 12 transfers between portfolios in a contract year, the Vanguard Lifetime Income Program reserves the right to charge $10 for each additional transfer.

The following states impose a premium tax on immediate annuities:

Assumed Investment Return (AIR)
The variable options are available with either a 3.5% AIR or a 5.0% AIR. The AIR assumes two pivotal valuation functions for a variable SPIA. It determines the initial annuity income payment as well as the variable adjustments to income. The higher the initial AIR, the higher the initial payment. Later income appreciation will be slower with a high AIR, and income losses likelier. A lower AIR results in a smaller initial income, but produces faster income appreciation, thus providing better hedging against inflation risk, as well as smaller income losses during down markets. For further information on Assumed Investment Return refer to Immediate Variable Annuity - SPIA and Vanguard Variable SPIA: Using Vanguard’s Inflation Indexed Securities Fund for Inflation Protection.

Exclusion Ratio
If the payments received from the Lifetime Income Program SPIA are from a qualified account, each payment will be totally taxable to the annuitant. If the payments are from a non-qualified account they will be made according to the General Rule which allows the untaxed basis in the contract to be recovered over the life expectancy of the annuitant(/s). Thus, while the exclusion ratio period exists, payments will be partially taxable. After the exclusion ratio period ends, all ensuing payments will be taxable.

Cancellation and Commutation
The Lifetime Income Program SPIA allows one to take withdrawals from the immediate annuity with the following options:
 * Cancellation Option: If you have selected this optional feature, you may cancel your contract within six months of the purchase date and receive a refund equal to the present value of your future income payments. The cancellation option also provides for the payment of a lump sum death benefit if the annuitant and joint annuitant (if any) both die within six months of the purchase date. The death benefit will equal the present value of future variable income payments plus any premium allocated to fixed annuity payments, minus any fixed payments already made. To qualify for the cancellation option, the annuitant must be younger than age 75 and the joint annuitant (if any) must be younger than age 80 at the time of purchase. If you meet these age requirements, this cancellation benefit is available as an option when you select either fixed only income payments (except in New York State) or variable income payments (in all states including New York). If you choose the cancellation option, the amount of each annuity payment will be lower than it would be without the cancellation option.
 * Commutation (Partial Withdrawals):If you have chosen a variable annuity payment option with a Guaranteed Period, then you will have the right to make one partial withdrawal per Contract Year from the present value of your remaining variable annuity payments subject to the following provisions:
 * Only one partial withdrawal is permitted during any Contract Year.
 * The minimum partial withdrawal amount is $2,500. The partial withdrawal is restricted to an amount that allows at least five (5) years of guaranteed period variable Annuity Payments to remain in the Contract after the withdrawal.
 * Partial Withdrawal Transaction Charge. A partial withdrawal transaction charge will be accessed for each partial withdrawal. The partial withdrawal transaction charge is the lesser of 2% of the amount withdrawn or $25. This charge will be deducted from the net proceeds of the partial withdrawal.
 * Any withdrawal will reduce the subsequent income stream from the SPIA (reflecting the reduced number of remaining annuity units funding the payouts) and will also reduce the guarantee period.
 * Partial withdrawals under the age of 59½ are subject to the 10% early withdrawal tax penalty, and it should be noted that a partial withdrawal or full surrender of the Contract after the Income Start Date but before the later of the taxpayer’s reaching age 59½ or 5 years after the Income Start Date would be treated as changing substantially equal payments. In that event, payments excepted from the 10% penalty tax because they were considered part of substantially equal payments would be subject to recapture. The recaptured tax is imposed in the year of the withdrawal or surrender (or other modification) and is equal to the tax that would have been imposed (plus interest) had the exception not applied. The possible application of this recapture tax should be considered before making a partial withdrawal or full surrender of the Contract.

Insurer Solvency
The Lifetime Income Program SPIA is offered through the AIG insurance company and payouts are subject to the claims paying solvency of the insurer. The insurer is currently rated:


 * 1) "A" Excellent for operating performance and financial strength by A.M. Best Company.
 * 2) "A+" Strong for insurer financial strength by Standard & Poor's Corp.
 * 3) "A1" Good for financial strength by Moody's Investors Services.
 * 4) "A-" Strong for insurer financial strength by Fitch IBCA, Duff & Phelps

In case of insurer default, your State Guarantee Fund will attempt to either find a replacement insurer for your contract, or will offer insurance on a given amount of annuity investment (usually up to $100,000, but greater in some states). The following links provide information on state guarantee limits, as well as what happens as a consequence of an insurance company failure.


 * State Guarantee Funds
 * NOLHGA:What Happens When An Insurance Company Fails

Papers

 * King, Francis P. "The TIAA Graded Method and the CPI" Teachers Insurance and Annuity Association, New York, NY, The College Retirement Equities Fund, Dec. 1995. Available at http://eric.ed.gov/ERICDocs/data/ericdocs2sql/content_storage_01/0000019b/80/14/b6/fa.pdf