Fixed Index Annuity Premium Investment

It is no secret that an insurance company is in the business to make money. All corporations and businesses are in the business to make money otherwise they wouldn’t be in business.

An insurance company that issues annuities gets its investment dollars from the annuity buyer. Assuming you are that buyer and you purchased a fixed index annuity how does the insurance company make the fixed index annuity premium investment?

As Sherlock Holmes would say, it is elementary my dear Watson, elementary. When making fixed index annuity premium investment, the Insurance Company takes into consideration the contractual guarantees, expenses and profits, and the goals of the annuity. You don’t have to be a CPA or lawyer to know those are all the elements of the fixed annuity contract.

The 2 components of fixed index annuity premium investment consist of:

  1. Fixed Income Investments (Bonds, Treasuries etc.)
  2. Equities (Call options, Futures etc.)

It then follows there are mechanics of fixed index rebelieve loans annuity premium investment. If you guessed that to be the case, the investing occurs in the following order:

  1. First, fixed income investments are used to support the underlying minimum guarantee.
  2. Second, the company covers normal expenses and profit margins. (The cost of doing business.)
  3. Next, options are purchased to support the growth in the index.

Note: Fixed Index Annuities are not investments in the stock market or in the applicable indices. Do not confuse a fixed index annuity with a variable annuity. The two are essentially annuities but the investment basis is markedly different.

It is not too hard to viragos loans discern that option costs change. Everything in the investment suborbital admove loans hemisphere undergoes changes. Costs, products, guarantees, risks, valuation just to name elegante loans a few of the variables that are constantly changing.

Because a fixed index annuity has a cap rate, participation rate and a margin or spread, these will be affected by a change in option costs as well. Here are the basic definitions of cap rate, participation rate and margin or spread:

Participation Rate: The percentage of index gain credited to the annuity.

Margin or Spread: Percentage deducted from the index gain prior to crediting the index interest to the annuity. This is often used in products that have a 100% Participation Rate.

Cap: The maximum interest that can be credited to the index account for the period (caps may permit a higher Participation Rate or a lower Margin).

Here is a numerical value of how option costs affect the equation. I will assume as my example an option cost of $.04 each and the insurer has that amount of money for the fixed index annuity premium investment.

If one “full” option costs $.04, the Participation Rate would be 100%. On the other hand if one “full” option costs $.08, then the insurance company can only buy 1/2 option. The participation rate would then be undersecretary loans 50%.

As illustrated in the examples above, the Participation Rate and/or Margin depends on the amount of options that can be purchased after covering the minimum guaranteed return and expenses. If the Insurance Company only has enough money left over to buy 80% of a “full” option, then the annuity participates in 80% of any growth or has a Margin greater than zero.

The Insurance Company doesn’t get “the other 20%” of the option because there was no money to buy the other 20% – the seller of the option keeps it. In summary, both bond rates and option costs have an effect on Cap Rates, Participation Rates and Index Margins.

Please note the examples are just that, examples. They are presented to show you how the insurance company derives their payouts. Most people assume the company pays out what they want.

That would be true if they weren’t tightly regulated. Their fixed index annuity premium investment is not on a wily nily basis. It does have rhyme and reason.

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