Rhode Island Life Insurance Practice Exam

How does an indexed annuity differ from a fixed annuity?

1. It has a guaranteed minimum interest rate

2. Indexed annuity owners may receive credited interest tied to the fluctuations of a linked index

3. It offers only fixed regular payments

4. Indexed annuities do not guarantee income

The correct answer is: Indexed annuity owners may receive credited interest tied to the fluctuations of a linked index

An indexed annuity differs from a fixed annuity primarily in how it credits interest to the policyholder. While a fixed annuity provides a predetermined, guaranteed interest rate over the term of the contract, an indexed annuity offers a return that is linked to the performance of a specific market index, such as the S&P 500. This means that the interest credited to an indexed annuity can vary based on the fluctuations of that index, allowing for the potential of higher returns during favorable market conditions. In an indexed annuity, the policyholder benefits from the upside potential of the linked index, while still having a level of protection against loss, usually supported by a guaranteed minimum interest rate; however, it’s important to note that this minimum rate may not be the only way returns are generated. The flexibility and potential for increased earnings tied to market performance distinguish indexed annuities from fixed annuities, which strictly offer stable, fixed payouts. This dynamic makes indexed annuities appealing to those seeking a combination of security and exposure to market growth.