Equity-Indexed Annuity
Credits interest tied to an equity index's gain with a guaranteed minimum, combining upside participation with a floor against loss.
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In an equity-indexed annuity, which feature limits the maximum amount of index gain credited to the contract in a single period?
The cap — An equity-indexed annuity credits interest based on the performance of a stock index, and the cap sets the maximum percentage of index gain that will be credited in a given period. The participation rate is the percentage of the index's gain that is credited, while the floor guarantees a minimum return, often zero percent, even if the index declines. The insurer's cost of providing the downside floor is offset by these limits on the upside, such as the cap.
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How is interest credited on an equity-indexed annuity?
Based on the performance of a stock index, such as the S&P 500, subject to a guaranteed minimum — An equity-indexed annuity credits interest by reference to the performance of a market index — most commonly the S&P 500 — while typically guaranteeing a minimum return, such as a floor of 0 percent. The owner does not own index shares; the insurer uses options or other instruments to deliver a capped or participation-based portion of index gains. This positions indexed annuities between fixed and variable products.
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