Question

10. Craig owns an index annuity that has a 90 percent participation rate, a 14 percent cap, and a zero percent floor. The contract is backed by a 2 percent minimum guaranteed rate. If the index return at the end of the crediting period is 10 percent, how much interest will be credited to Craig's contract for that term?
(Search Chapter 2)

• a. 14 percent
• b. 10 percent
• c. 9 percent
• d. 2 percent

Answer 1

The index annuity works in such a way that if there is a cap then the interest rate can be maximum to that cap while minimum guaranteed indicates the minimum interest rate that will be credited.

Now since the participation rate is 90% and the index has returned 10%, thus it will return 0.9*10% = 9% interest rate.

This is well within the range of 2% - 14% and thus doesn't need any adjusting.