Do you know how an insurance company that issues annuities prices them? If not, don’t feel bad. Even some of the advisors who sell annuities don’t know exactly how the carriers make money.
The biggest misconception is that many people believe that the insurance carrier invests the assets that they receive directly into the indexes that the Fixed Indexed Annuity (FIA) product offers, and then the carrier keeps the spread.
In reality, the carrier usually never invests directly into the actual index. Instead, they are buying high quality (and some lower quality) bonds, in conjunction with certain derivatives to help them hedge their positions.
Make sure to watch this entire video as it is the best on the internet at explaining option pricing for insurance carriers. This video explains in broad terms exactly what a Stock Option is, and how an insurance company prices them within their fixed indexed annuities.
To learn more from this annuity professional, click here (Rob Brinkman).
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