Actuarial Finance

8 Equity-linked insurance and annuities

Equity-linked insurance or annuity (ELIA) is the generic term to designate a life insurance or annuity that includes benefits tied to the return of a reference portfolio of assets. For example, instead of adjusting the death benefit with inflation (or some predetermined rate of return), the benefit could increase with the returns of a financial index, e.g. the S&P 500. An ELIA is a hybrid between a life insurance (or annuity) policy and a pure investment product as it gives the policyholder an opportunity to benefit from the upside potential while being protected against the downside risk. It competes with mutual funds¹ with the important distinction that ELIAs include various guarantees at the maturity of the contract and/or on the death of the policyholder.

During their active years, policyholders invest their savings in preparation for retirement. Then, at retirement, they annuitize their savings, i.e. the accumulated savings are used to buy an annuity-type product that provides a regular stream of income until death. These two steps are known as the accumulation and the annuitization phases. ELIAs, depending on their features, can be used for one or both phases.

It is important at this point to mention that in actuarial and financial mathematics, there is a clear distinction between a life insurance contract and an annuity. The former ...