Which type of annuity is linked to a market-related index?

An equity-indexed annuity is specifically designed to provide returns that are linked to a market-related index, such as the S&P 500. This kind of annuity combines features of both fixed and variable annuities, offering a minimum guaranteed interest rate while also allowing for potential growth based on the performance of a chosen stock market index. The policyholder benefits from this linkage, as it means they can take advantage of market gains without the risk of directly investing in the market.

This structure appeals to individuals who desire a balance between security and growth potential. Unlike fixed annuities, which guarantee a set rate of return regardless of market performance, and variable annuities that allow for direct investments in various funds where returns can fluctuate significantly, equity-indexed annuities provide a compromise. They often have caps on returns and participation rates that dictate how much of the index's growth will be credited to the annuity, but they still offer a chance to benefit from market increases while providing downside protection.

Immediate annuities, on the other hand, focus on providing guaranteed income starting almost immediately after a lump sum payment, without linking to any indices.