Which of the following is not a feature of equity-indexed annuities?

Introduction

Equity-indexed annuities are a type of investment product that combines features of both fixed and variable annuities. They offer the potential for higher returns compared to traditional fixed annuities, while also providing some level of protection against market downturns. However, not all equity-indexed annuities are created equal, and it’s important to understand their features and limitations. In this article, we will explore the various characteristics of equity-indexed annuities and identify which of the following is not a feature of these annuities.

Participation Rate

One of the key features of equity-indexed annuities is the participation rate. The participation rate determines how much of the index’s gain will be credited to the annuity’s value. For example, if the participation rate is 80%, and the index gains 10%, the annuity will be credited with an 8% return. The participation rate can vary depending on the specific annuity product and can be an important factor to consider when comparing different options.

Cap Rate

Another feature of equity-indexed annuities is the cap rate. The cap rate sets a maximum limit on the amount of return that will be credited to the annuity, regardless of how much the index gains. For instance, if the cap rate is 6% and the index gains 8%, the annuity will only be credited with a 6% return. The cap rate is designed to protect the insurance company from excessive liability in case of significant market gains.

Guaranteed Minimum Interest Rate

Equity-indexed annuities also offer a guaranteed minimum interest rate. This feature ensures that even if the index performs poorly, the annuity will still earn a minimum level of interest. The guaranteed minimum interest rate is typically lower than the potential returns offered by the participation rate, but it provides a level of security for investors. The specific guaranteed minimum interest rate can vary between annuity products and should be carefully considered when evaluating different options.

Surrender Charges

Surrender charges are a common feature of equity-indexed annuities. These charges are applied if the annuity is surrendered or withdrawn before a specific period, typically known as the surrender period. The surrender charges are intended to discourage early withdrawals and can be a significant factor to consider when deciding to invest in an equity-indexed annuity. It’s important to carefully review the surrender charge schedule before making any investment decisions.

Death Benefit

Equity-indexed annuities often provide a death benefit feature. In the event of the annuitant’s death, the annuity’s value is paid out to the designated beneficiary. The death benefit can provide financial security for loved ones and is an important consideration for individuals looking to protect their assets and provide for their heirs.

Conclusion

In conclusion, equity-indexed annuities offer a unique combination of features that can be appealing to investors seeking potential market-linked returns with some level of downside protection. The participation rate, cap rate, guaranteed minimum interest rate, surrender charges, and death benefit are all common features of equity-indexed annuities. However, the feature that is not typically associated with equity-indexed annuities is the option to actively manage the underlying investments. Unlike variable annuities, equity-indexed annuities do not allow investors to choose specific investments or make changes to the underlying portfolio.