AD Banker Comprehensive Practice Exam

Which type of annuity has 'upside potential, but no downside risk' in relation to the stock market?

1. Market Value Adjustment

2. Variable

3. Fixed

4. Indexed

The correct answer is: Indexed

Indexed annuities provide the benefit of having upside potential linked to the performance of a stock market index while protecting the investor from downside risk. This means that if the stock market performs well, the investor can gain interest based on that performance, but if the market declines, the investment does not lose value; instead, it will typically at least return the principal amount. This unique characteristic makes indexed annuities appealing for individuals looking to participate in stock market gains without exposing themselves to the losses that can come from direct investment in stocks. The way these annuities work allows for a capped growth based on the index performance, ensuring that investors have the opportunity for growth without the concern of losing money when markets decline. On the other hand, other types of annuities, such as fixed and variable annuities, either provide stable returns with no connection to stock market performance or expose investors to market fluctuations directly, thus lacking the balance of upside potential and downside protection found in indexed annuities. Market Value Adjustment annuities also focus on adjustment based on market conditions but do not inherently offer the same protection against losses tied to stock market performance.