In what way does an Indexed (or Equity Indexed) Annuity determine its interest rates?

An indexed or equity-indexed annuity determines its interest rates by linking them to the performance of a stock market index, such as the S&P 500. This type of annuity offers the potential for higher returns than standard fixed annuities, while still providing a level of security through a guaranteed minimum return, regardless of market performance.

Investors benefit from the upside potential of the stock market while having a degree of protection against market downturns. The interest credited to the annuity is usually based on a formula that considers the movement of the index over a specified period, allowing policyholders to participate in market gains in a structured way.

While other options, such as fixed government bonds or the insurer's profitability, may influence the overall environment in which annuities operate, they do not directly dictate how indexed annuities calculate interest. The unique feature of these products lies in their direct correlation to market indices, making option B the correct choice.