When an index annuity subtracts a certain amount from the index-linked interest calculated before crediting to the annuity, it is referred to as incorporating a "spread" or "margin."
Here's a detailed, step-by-step explanation of what a spread or margin means in this context:
1. Initial Value of the Index-Linked Interest:
We start with the initial value of the interest that the index annuity would have generated. In this example, this initial value is 100.
2. Subtracting a Specified Value:
The annuity policy specifies a certain amount that is to be subtracted from the index-linked interest before it is credited to the annuity. This value is 5 in this scenario.
3. Calculating the Final Interest:
The final interest credited to the annuity is determined by subtracting the specified amount (step 2) from the initial value (step 1).
The calculation proceeds as follows:
[tex]\[
\text{Final Value} = \text{Initial Value} - \text{Subtract Value}
\][/tex]
Substituting the given values,
[tex]\[
\text{Final Value} = 100 - 5 = 95
\][/tex]
Hence, the final credited interest after applying the spread is 95.
To summarize, when an index annuity subtracts a specific amount from the index-linked interest before crediting, it's known as using a "spread" or "margin." In this case, the initial index-linked interest was 100, the subtracted amount was 5, resulting in a final credited interest of 95.
