Indexed Annuity Crediting Strategies and Interest Rate Concepts Flashcards

What is the primary benchmark index most commonly used in fixed indexed annuities?

Answer: S&P 500 Index

The S&P 500 is the most widely used index benchmark in fixed indexed annuities due to its broad market representation and widespread familiarity among consumers.

In a fixed indexed annuity, what happens to the policy owner's principal if the linked index performs negatively during a crediting period?

Answer: The principal is protected and no interest is credited for that period

A core feature of fixed indexed annuities is downside protection: the principal is guaranteed against market loss, and in a down market period the credited interest is simply zero rather than negative.

What is a 'participation rate' in a fixed indexed annuity?

Answer: The percentage of index gains credited to the policy owner

A participation rate determines what proportion of the index's positive performance is credited to the annuity owner, for example a 70% participation rate on a 10% index gain yields a 7% credit.

Which crediting method calculates interest based solely on the difference between the index value at the start and at the end of a contract term?

Answer: Annual point-to-point

The annual point-to-point method compares the index value at two discrete points in time—start and end of the term—ignoring all intra-period fluctuations.

What is an interest rate 'cap' in a fixed indexed annuity?

Answer: The maximum interest rate that can be credited during any crediting period

A cap limits the maximum interest that can be credited in a period; if the index gains 15% but the cap is 8%, only 8% is credited to the account.

In a fixed indexed annuity, what does the 'floor' most commonly represent?

Answer: The minimum guaranteed interest rate, typically 0%, protecting against negative credits

The floor is the minimum interest that can be credited in any period, usually 0%, ensuring that even in strongly negative market years the policy owner never receives a negative credit.

What is a 'spread' (also called a margin or asset fee) in the context of indexed annuity interest crediting?

Answer: An amount deducted from index gains before interest is credited to the policy

A spread is subtracted from the index gain before crediting; for example, if the index gains 10% and the spread is 2%, only 8% is credited to the contract.