Question

When a customer purchases an Equity Indexed Annuity, what factors will an insurance company use to limit it exposure or risk? (Select all that apply)

-Participation Rate

-Caps

-Remove any guaranteed returns

-Fee (Flat or Spread)

Answer 1

So, Insurance company can use the following factors to limit the exposure or risk:-

1) Participation Rate - It is a percentage of return on index which is credited to annuities by the insurance companies. For eg:- if participation rate is 80% and index returns are 15%, then 12% will be credited.

2) Caps - It is an upper limit which generally the insurance company uses to limit the risk. For eg: if the index gave a return of 12% but if the annuity had a cap of 5%, then investor will get 5% only.

3) Fee ( Flat or Spread) - It is kind of percentage fee which gets subtracted from the gain made from the annuity. For eg: if the fee is 3% and gain made is 8%, then 5% (8% - 3%) will be credited.