Equity-indexed annuity (EIA)

An equity-indexed annuity sits between a fixed annuity and a variable annuity. Like a fixed annuity, it guarantees that the contract will not lose value from index declines and credits at least a stated minimum rate of interest. Like a variable annuity, its actual return depends on market performance — but indirectly, through a formula tied to an index rather than through ownership of separate account subaccounts.

Three features determine how much of the index's gain the contract actually credits. The participation rate sets the share of the index gain used in the calculation — a 70% participation rate on a 10% index gain produces a 7% starting figure. The cap rate places a ceiling on the credited interest regardless of how far the index rises. Some contracts also apply a spread or margin, subtracting a fixed percentage from the index gain. The insurer can typically adjust these features within contractual limits, and surrender charges apply for a period of years after purchase.

Because the insurer bears the investment risk and the contract is not registered as a security, an equity-indexed annuity is an insurance product sold by licensed insurance producers rather than a security sold by registered representatives. This distinction matters: a variable annuity, where the contract owner bears investment risk through separate accounts, is a security requiring securities registration. Investors give up full market participation in exchange for downside protection.

Equity-indexed annuities are tested on the Series 65 within investment vehicle characteristics, where you should be able to place them on the spectrum between fixed and variable products and explain participation rates and caps. They also appear in the annuities material on life insurance and combined life and health licensing exams.