Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceHard
A client is considering purchasing an annuity and is concerned about protecting their principal from market downturns while still having the potential for some market-linked growth. They are risk-averse but want more upside than a traditional fixed annuity. Which annuity type would be most appropriate?
- AImmediate Annuity
- BFixed Annuity
- CEquity-Indexed Annuity (EIA)
- DVariable Annuity
Show answer & explanationAnswer & explanation
Correct answer: C. Equity-Indexed Annuity (EIA)
An Equity-Indexed Annuity (EIA) offers a unique balance by providing principal protection (like a fixed annuity) combined with the potential for market-linked growth (tied to an equity index like the S&P 500). It typically has a minimum guaranteed interest rate and participation rates that cap the upside potential but shield from downside risk.
Why the other options are wrong
- A. An Immediate Annuity is about payout timing, not investment growth strategy or risk protection; it can be fixed or variable.
- B. A Fixed Annuity offers principal protection and guaranteed interest but no market-linked growth potential.
- D. A Variable Annuity offers market-linked growth but exposes the principal to market risk, which the client wants to avoid.
Equity-Indexed Annuity (EIA)
An annuity that offers a minimum guaranteed interest rate combined with an interest rate tied to the performance of a stock market index (e.g., S&P 500). It provides principal protection against market downturns while allowing for some market-linked growth.
- Hybrid product: combines features of fixed and variable annuities
- Principal protection (guaranteed minimum interest rate)
- Growth linked to a stock market index (e.g., S&P 500)
- Participation rates, caps, and spreads limit upside potential
- Less risk than variable, more growth potential than fixed
Memory trick: Equity-Indexed: Protects the base, but aims for the race.