Which option correctly describes the participation rate of equity-indexed annuities?

The participation rate of equity-indexed annuities is a crucial element that determines how much of the index's gains the annuity owner can participate in. When the participation rate is less than 100%, it means that the investor will receive only a portion of the gains generated by the index. For example, if the participation rate is set at 80%, and the index experiences a gain of 10%, the annuity owner would receive only 8% of that gain.

This characteristic allows insurance companies to manage their risk while still providing annuity holders with exposure to potential equity market gains. While they can benefit from market increases, this also means there is a cap on the potential profit they can earn compared to direct equity investments. Options that suggest a participation rate of 100% or guaranteed profit above market conditions do not accurately reflect how equity-indexed annuities operate. They inherently involve some limitations in growth potential, which is reflected in the flexibility of the participation rate.