In equity indexed annuities, how is the minimum return determined?

In equity indexed annuities, the minimum return is determined through a guaranteed minimum rate of return. This feature is key to the appeal of equity indexed annuities, as it protects the investor from losing money if the stock market performs poorly. Essentially, while the returns are tied to a specific equity index, such as the S&P 500, the inclusion of a guaranteed minimum ensures that the annuitant will receive at least a predefined return even if the index underperforms. This balance of risk and reward is what differentiates equity indexed annuities from more traditional investment vehicles, where the potential for loss could be greater without such a guarantee. This secured aspect encourages individuals to invest, knowing that they have a safety net in place.