Which of the following best describes an equity indexed annuity?

An equity indexed annuity is designed to provide a combination of features, including the potential for growth linked to stock market performance while also offering a level of security. This type of annuity typically has a minimum guaranteed interest rate, which means that the investor will receive at least that minimum return, regardless of how the stock market performs. However, the real value of the equity indexed annuity lies in its connection to the stock market, which allows for the potential of higher returns based on the performance of a specific market index, such as the S&P 500.

This structure enables policyholders to benefit from market gains without the risk of losing their principal investment during market downturns. The potential for increased returns makes equity indexed annuities attractive for those looking for growth opportunities within a more secure framework compared to direct stock market investment.

In contrast, the other choices describe features that do not align with how equity indexed annuities operate. For example, providing only guaranteed interest does not capture the essence of being indexed to market performance. Offering fixed payments for a set period characterizes a different type of annuity altogether, such as a fixed annuity, which does not involve market indexing. Additionally, stating that the annuity is exempt from federal taxes is