Registered Index-Linked Annuity

Callowfield Life offers a registered index-linked annuity whose crediting formula absorbs a stated amount of index loss and passes any further loss to the owner. Compared with a traditional fixed indexed annuity, this contract

1. A.is not a security, because the insurer continues to absorb a stated portion of any index loss.Wrong. Absorbing part of a loss leaves the residual with the owner, and the residual is what matters.
2. B.is a security, because the owner can lose principal as a result of index performance.Correct. Exposure of principal to market results is the line that separates a registered contract from an insurance one.
3. C.is a security only where the supporting assets are held in the general account of the insurer.Wrong. General account funding is a hallmark of unregistered insurance products, not a trigger for registration.
4. D.is not a security, since the crediting formula tracks an index rather than a managed portfolio.Wrong. A traditional indexed annuity tracks an index too and is not a security, so the reference decides nothing.

Why: Classification turns on whether the owner can lose money to market performance, not on whether an index is referenced or how much protection the insurer offers. A traditional fixed indexed annuity floors the credit at zero, so the owner never loses principal to the index and the contract stays outside the definition of a security. An index-linked contract that passes losses beyond a buffer hands genuine investment risk to the owner, so it is registered and sold with a prospectus. Partial protection reduces the magnitude of that risk without changing who ultimately carries it.

Sunniva Halloran is shown a registered index-linked annuity that credits index gains up to a 12% annual cap and absorbs the first 10% of any index decline, a feature the issuer calls a 10% BUFFER. Over the crediting term the reference index falls 25%. Ignoring fees and optional riders, her crediting for that term is:

1. A.A loss of 25%This ignores the buffer entirely. The first 10 points of decline are absorbed by the insurer.
2. B.A loss of 15%Correct. The insurer absorbs the first 10 points of the 25% decline and Halloran bears the remaining 15.
3. C.A loss of 10%That is the result under a 10% FLOOR, not a 10% buffer.
4. D.No loss, because the buffer protects against the entire declineA buffer protects only the first 10 percentage points. Losses beyond it pass through in full.

Why: A buffer absorbs losses from the first dollar down to the buffer amount and passes through everything beyond it. The insurer absorbs the first 10 percentage points of the 25% decline, leaving Halloran with a 15% loss. This is the opposite of a FLOOR, which would absorb everything past a stated point and cap her loss at 10%. Because principal is genuinely at risk beyond the buffer, these contracts are registered securities.