How is an equity indexed annuity's growth determined?

An equity indexed annuity is designed to provide a return that is linked to a specific economic index, such as the S&P 500. This type of annuity combines features of both fixed and variable annuities, offering potential for growth while also providing a level of protection against market volatility. The growth is influenced by the performance of the index to which it is tied, but it is not directly invested in stocks, which differentiates it from options that rely entirely on stock market performance.

Unlike a fixed rate of return, equity indexed annuities may have a baseline return plus the potential for additional gains based on index performance, up to an established cap. This structure allows the annuitant to participate in some upside potential while also ensuring a degree of security with minimum guaranteed returns. Therefore, option A accurately captures the mechanism of how the growth in equity indexed annuities is determined.