Indexed Annuities

Lesson

Indexed annuities are a type of insurance product that combines features of both fixed and variable annuities. They offer a guaranteed minimum return, like fixed annuities, but also provide the potential for higher returns based on the performance of a market index, like variable annuities. However, the returns are typically capped, and fees and surrender charges may be associated with these products.

Practice Question #1

Which of the following best describes an indexed annuity?

A) An insurance product that provides a guaranteed interest rate and a fixed series of payments.

B) An insurance product that allows the owner to invest in a variety of investment options, with returns based on the performance of those investments.

C) An insurance product that combines features of fixed and variable annuities, offering a guaranteed minimum return and the potential for higher returns based on a market index.

D) An insurance product that begins making payments immediately after purchase, typically used for income in retirement.

Select an option above to see an explanation here.

A) This describes a fixed annuity. B) This describes a variable annuity. C) This is the correct definition of an indexed annuity. D) This describes an immediate annuity.

Terms

Indexed annuity:: An insurance product that combines fixed and variable annuities features, offering a guaranteed minimum return and the potential for higher returns based on a market index.
Market index:: A benchmark used to measure the performance of a group of securities, such as the S&P 500 or the Dow Jones Industrial Average.
Guaranteed minimum return:: The minimum amount of interest that an indexed annuity will earn, regardless of market performance.
Cap:: The maximum return an indexed annuity can earn in a given period, regardless of the market index's performance.
Participation rate:: The percentage of the market index's return that the indexed annuity will earn.
Floor:: The minimum return an indexed annuity can earn in a given period, regardless of the market index's performance.
Surrender charge:: A fee charged by the insurance company if the annuity is surrendered before a specified period.
Rider:: An optional feature that can be added to an indexed annuity contract for an additional cost, providing other benefits or guarantees.

Practice Question #2

What is the purpose of a cap in an indexed annuity?

A) To limit the amount of interest that can be earned in a given period.

B) To guarantee a minimum return regardless of market performance.

C) To allow the annuity owner to withdraw a certain percentage of the contract value without incurring surrender charges.

D) To lock in gains from the market index and reset the annuity's value for the next period.

Select an option above to see an explanation here.

A) The cap limits an indexed annuity's maximum return in a given period. B) This describes the guaranteed minimum return. C) This describes the free withdrawal provision. D) This describes the reset feature.

Do Not Confuse With

Fixed annuity:: An insurance product that provides a guaranteed interest rate and a fixed series of payments.
Variable annuity:: An insurance product that allows the owner to invest in various investment options, with returns based on the performance of those investments.

Practice Question #3

Which of the following is an optional feature that can be added to an indexed annuity contract for an additional cost, providing additional benefits or guarantees?

A) Cap

B) Participation rate

C) Rider

D) Floor

Select an option above to see an explanation here.

A) The cap is a standard feature of indexed annuities, limiting the maximum return. B) The participation rate is a standard feature of indexed annuities, determining the percentage of the market index's return that the annuity will earn. C) A rider is an optional feature that can be added to an indexed annuity contract for an additional cost, providing other benefits or guarantees. D) The floor is a standard feature of indexed annuities, providing a minimum return regardless of market performance.

Historical Example

In the early 2000s, indexed annuities gained popularity as investors sought alternatives to the volatile stock market. Many investors were attracted to the potential for higher returns than traditional fixed annuities while still having some protection against market downturns.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

An investor nearing retirement may choose to purchase an indexed annuity to provide a guaranteed income stream while still having the potential for higher returns based on the performance of a market index. This can help the investor balance the need for income with the desire for growth in their portfolio.