Darcy owns an indexed annuity. The index that supports her annuity was at 1000 when the contract’s interest crediting period began and 1200 when the crediting period ended. What is the index increase?
- a. 10 percent
- b. 20 percent
- c. 40 percent
- d. 200 percent
The correct answer and explanation is:
The correct answer is:
b. 20 percent
Explanation:
To calculate the index increase, we use the percentage change formula: Percentage Increase=(New Value−Old ValueOld Value)×100\text{Percentage Increase} = \left( \frac{\text{New Value} – \text{Old Value}}{\text{Old Value}} \right) \times 100
Given:
- Old Value (Beginning Index) = 1000
- New Value (Ending Index) = 1200
Percentage Increase=(1200−10001000)×100\text{Percentage Increase} = \left( \frac{1200 – 1000}{1000} \right) \times 100 =(2001000)×100= \left( \frac{200}{1000} \right) \times 100 =0.2×100= 0.2 \times 100 =20%= 20\%
Thus, the index increased by 20 percent over the interest crediting period.
Understanding Indexed Annuities:
An indexed annuity is a financial product that earns interest based on the performance of a stock market index, such as the S&P 500. Unlike direct stock investments, indexed annuities offer a guaranteed minimum return and protection against market downturns. This makes them an attractive choice for individuals looking for a mix of security and growth potential.
In Darcy’s case, the increase in the index from 1000 to 1200 means that her annuity will benefit from a positive return. However, the actual amount of interest credited to her annuity will depend on the specific crediting method used in her contract. Some common crediting methods include:
- Point-to-Point: Compares index values at the start and end of a period.
- Monthly Averaging: Takes the average of monthly index values.
- Participation Rate & Caps: Limits how much of the index increase is credited.
Since the index increased by 20%, Darcy’s annuity may gain value, but the exact credited amount will depend on her contract’s terms.
Now, generating the image… 🎨
Here’s the image illustrating the indexed annuity growth. It visually represents the index increase from 1000 to 1200 (a 20% rise), with a financial advisor explaining the growth to Darcy. Let me know if you need any modifications! 😊
