Question

Your client is invested in a registered indexed-linked annuity (RILA). The RILA contains a 7% floor, an 80% participation rate, and an overall cap rate of 10%. Suppose in years one and two, the S&P 500 returns 12% and -10%, respectively. What interest rate would be credited to the RILA during these two years?

Answer 1

Step-by-step explanation:

In a registered indexed-linked annuity (RILA), the interest credited to the annuity is typically calculated based on the performance of an underlying index, such as the S&P 500. The interest credited can be subject to various factors, including participation rates, floor rates, and cap rates.

Given the information provided:

Floor Rate: 7%

Participation Rate: 80%

Cap Rate: 10%

S&P 500 Returns: 12% (Year 1) and -10% (Year 2)

Let's calculate the interest credited for each year:

Year 1:

The S&P 500 returned 12%, but the participation rate is 80%. Therefore, the interest credited is 80% of 12%, which is 0.8 * 0.12 = 0.096, or 9.6%.

Year 2:

The S&P 500 returned -10%, but the floor rate is 7%, which means that the interest credited cannot be negative. So, the interest credited is 7%.

So, in Year 1, the interest credited to the RILA is 9.6%, and in Year 2, the interest credited is 7%.