Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A client is considering purchasing an annuity and is concerned about protecting their principal from market downturns while still participating in some market growth. They also want to guarantee a minimum interest rate. Which type of annuity would best meet these needs?
- AFixed Annuity
- BVariable Annuity
- CEquity-Indexed Annuity
- DImmediate Annuity
Show answer & explanationAnswer & explanation
Correct answer: C. Equity-Indexed Annuity
An Equity-Indexed Annuity (EIA) offers a unique balance by providing a guaranteed minimum interest rate, protecting principal from market losses, while also allowing participation in a portion of market gains through an index like the S&P 500.
Why the other options are wrong
- A. A fixed annuity offers guaranteed principal and a fixed interest rate but no participation in market growth.
- B. A variable annuity offers market participation but comes with market risk, meaning principal is not protected from downturns.
- D. An immediate annuity focuses on immediate income payments and does not address market participation or principal protection in the accumulation phase.
Equity-Indexed Annuity (EIA)
A type of deferred annuity that offers a guaranteed minimum interest rate, principal protection against market downturns, and the potential for interest credited based on the performance of a market index.
- Principal protection
- Guaranteed minimum interest rate
- Market index participation (capped or participation rate)
- Balances security with growth potential
Memory trick: Fixed for safety, Variable for risk, Indexed for balance.