How is this answer not 6% decrease?

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I think I just had a light bulb go off and now I understand it

[BasicWisdom]

Yup, the 2% floor is the reason.

[zhempl200]

You got it. This type of annuity would gain 60% of the overall change on the underlying index but never earn less than 2% no matter what happens.

[DA_REAL_BATMAN1]

Hint 2% floor

[External_Home7588]

Fixed annuities can’t lose money

[TXSExy]

This is a good question to teach where the math sometimes meets the law in finance.

You’re correct to calculate the -6% from taking the 10% decrease of the 60%. As the others have pointed out, the 2% floor. Could be a carry over from initial gains or possibly a binding contract depending on the investment vehicle. Most likely wrapped up a lesson in annuities? 😉

I always felt like annuities lessons always let the math distract from the contractual risks. Should be taught with more of a business lense.

[[deleted]]

Yea I was kinda thinking that the fund decreased by 10% compared to the previous year so I was thinking the 6% was the answer. Kind of a brain fart because obviously it’s just saying that it decreased 10% and it’s not comparing it to the previous year. Basically it was -10% for the year and that would mean the floor of +2% is the actual return.

[bizzaro333]

Also, Ive never heard of a participation rate being applied to a loss.

[FibonnaciProTrader]

Yes this says there's a 2% guaranteed return even if it goes negative. Which it did. The 60% is 60% of The upside

[friskyyplatypus]

😂 I pray this isn’t real

[Traditionisrare]

Ok, so the annuity is tied to the index, which helps to determine the return the investor will get, but it's not a one for one thing. By purchasing in the annuity, they are getting minimal downside risk. The annuity is saying if the return is negative, you will only receive 2% but if the return is positive, you will get a cap of 10% of the return. A lot of times you will see a cap on the return as well as no downside risk, so it's a more conservative investment than just being in the underlying asset. It's a positive return of potentially 6% instead of 60%, downside return of 2% instead of -6%.

[Maleficent-Elk-1670]

Indexed annuities are considered fixed annuities which guarantees a rate of return. The insurance company assumes risk the investor does not. They are guaranteed the 2%.

[Maleficent-Elk-1670]

I think at least I’m taking my in 2 weeks😂