Indexed annuities, as noted earlier, are fixed annuity products designed to solve the problem of market downturns for individual investors and savers through the use of a hedging strategy. That is, the insurance company invests most of the owner's premium dollars in the fixed-rate investments that back traditional, interest-based annuities.
These investments support the underlying guaranteed contract value. From these earnings, the company deducts a "spread" to cover expenses and a profit margin. The balance of the earnings is used to purchase call options on the index. If the applicable index declines or is level, there is no decline in the annuity account value; principal and prior earnings are locked in and are guaranteed never to decline due to market drops. Unfortunately for the consumer, indexed annuity products are overly complex, making suitability a key issue for producers.
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