| Averaging Most EIA policies
use some form of averaging to measure the price performance of the index used.
Averaging is used to reduce the impact of market volatility, and has the effect
of smoothing out severe swings in the market -- increases and decreases in stock
prices. Averaging methods used include monthly and daily averaging and are most
often used in combination with the annual reset EIAs.
Cap
A cap is the maximum amount of indexed interest credited to an EIA. A cap is
often used in combination with a high participation rate and is common to EIAs
with the annual reset design. See Caps vs. Fees
Floor The minimum credited interest rate,
also known as the guaranteed interest rate.
Index
Term The specified period of time during which an EIA policy is indexed.
Some EIA policies allow a renewal at the end of the specified index term.
Index Value The value, or market price, of the
chosen equity index.
Participation Rate
The percentage amount of the increase in the market value of the index used to
determine the amount of indexed interest to be credited. The percentage stated
is multiplied by the amount of increase in the index value to determine indexed
interest. For example, when the S&P 500 value increases 10%, an EIA with a
100% participation rate will receive indexed interest of 10% (unless a cap or
yield spread margin is applied). Index option prices and bond yields are two primary
factors that affect EIA participation rates. When option prices increase or bond
yields decrease, participation rates usually are lowered by the issuing insurance
company.
Reset The indexed interest
is credited and locked in, setting a new starting point or set point. This feature
counts gains from reset point to reset point. Annual reset is the most common
method gains are counted, annually recognizing those gains, and locking in all
gains so that they are not lost in market down-turns. Annual reset design
will usually deliver the best performance during times of market volatility.
Starting Point The policy effective date, which
marks the beginning of the index term.
Yield Spread
or Asset Fee Yield spread is often called the asset fee or margin reduction.
It is stated as a percentage deducted from the amount of indexed interest. It
is used to cover the expenses of purchasing options and other underlying expenses.
The yield spread deduction has the same effect as a participation rate of less
than 100% would have. For example, if the index increases 10%, an EIA with
a yield spread of 3% would receive interest of 7% after deducting the fee. See
Caps vs Fees | 
