A fixed annuity premiums are invested in the insurance company's general account. The minimum interest is set at 2.5%. The investment only drew 2%. What interest rate will the insurer pay?
A. 2.5%
B. Whatever the company deems appropriate
C. 290
D. 0.390
Answer (2)
The annuity has a guaranteed minimum interest rate of 2.5%.
The investment drew only 2%.
The insurer is obligated to pay the guaranteed minimum.
The insurer will pay 2.5% .
Explanation
Understanding the Problem We are given a fixed annuity where the minimum guaranteed interest rate is 2.5%. The investment only drew 2%. We need to determine the interest rate the insurer will pay.
Applying the Guarantee Since the annuity has a guaranteed minimum interest rate of 2.5%, and the investment only drew 2%, the insurer is obligated to pay the guaranteed minimum rate.
Determining the Interest Rate Therefore, the insurer will pay 2.5%.
Examples
Annuities are often used in retirement planning to provide a steady stream of income. Understanding the guaranteed minimum interest rate helps individuals plan their finances with confidence, knowing that their investment will grow at least by that guaranteed rate, even if the market performs poorly. This ensures a baseline level of financial security during retirement.
The insurer will pay a guaranteed interest rate of 2.5% since it is higher than the actual investment return of 2%. The minimum guaranteed interest rate ensures financial security for annuity holders. Therefore, the chosen option is A: 2.5%.
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