Annuities and Equity Indexed Annuities

Vocabulary terms and definitions regarding fixed annuities, equity-indexed annuities (EIAs), their crediting methods, and associated risks and fees.

Fixed annuity

A type of annuity where contributions go into the insurance company’s general account and growth is at a guaranteed rate; it is not considered a security because the investor does not take on investment-related risk.

General account

The account of an insurance company where funds for fixed annuities are held and invested, allowing the company to guarantee a specific rate of return.

Inflation (purchasing power) risk

The risk that the prices of goods and services rise by a higher percentage than the investment's rate of return, a risk common to fixed annuities.

Equity indexed annuity (EIA)

A contract that links returns to an equity index (such as the S&P 500) while providing a minimum guaranteed return; they are generally not considered securities.

Participation rate

An EIA restriction that credits only a specific portion of the index's return (e.g., an $80\%$ rate would credit $8\%$ if the index returns $10\%$).

Cap (ceiling)

An EIA feature that sets a maximum percentage of return that can be credited to the investor, regardless of index performance.

Spread rate (margin, asset fee)

An EIA restriction where a stated percentage is subtracted from the index's return before crediting the investor (e.g., a $3\%$ rate applied to a $12\%$ gain results in a $9\%$ credit).

Floor

The minimum growth rate guaranteed to an EIA investor, often set at $0\%$ to protect against index declines; if not specified in a test question, it is assumed to be $0\%$.

Annual reset

An index crediting method that compares the index value at the start of the period to its value exactly one year later.

Point-to-point

An index crediting method that compares the index value at two specific measurement points that can be any duration apart, such as a month or several years.

High water mark

An index crediting method that compares the starting index value to the highest index value reached during a specified period.

Low water mark

An index crediting method that compares the lowest index value reached during a specific period to the ending index value.

Surrender charges

Fees assessed if an investor withdraws funds from an annuity before a specified period (typically at least $6$ to $10$ years) ends.