In the accumulation phase, it protects against loss of capital due to market decline. In the distributrion phase, it protects aginst diminishment or loss of income.
Insurer invests most of the principal in bonds to ensure that the policy will generate a small annual return, but the insurer uses a small portion of the premium to buy options in stock-market index. Exercise of the options can result in additional interest credited to a policy, potentially more than an investor might achieve through other fixed-income investments.
Particularly well-suited for people near or in retirement who cannot afford to lose money due to stock-market declines. In taxable accounts, these products provide tax deferral that should reduce annual taxable income, a feature especially useful to those in high tax brackets. The product can be converted through the annuitization option to a reliable stream of income that lasts a lifetime and can be of great value to people without pensions.
People in low tax brackets or people with money already in tax-deferred accounts. People who already have a guaranteed retirement income stream. People with equity investments who can afford to ride out stock-market declines over protracted periods. People who may unexpectedly and immediately need their money; surrender charges can exceed 8% and commonly last for 10 years or more.
Withdrawals prior to age 59 1/2 are subject to a 10% federal income tax penalty. However, sheltering earnings from annual income taxes works best over a long time.
Single-premium products typically are bought by people with large amounts in low-yielding fixed-income investments; periodic premiums.