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The principal does get reset to current principal value.
I assume this is done yearly, otherwise the guarantee doesn't make sense. So you're saying this annuity will return a long-term average of 5 - 8%/year on your money, with 2 1/2%/year guaranteed.

Dividends and fees were not mentioned by the sales person. Do most annuities have separate fees attached.
The return of any stock or stock mutual fund can be calculated in one of two ways, change in share value, or change in share value with any dividends/capital gains reinvested. For the S&P500 index, I believe there is a 2% or 3% yearly difference, on average, between the former and the latter.
Regarding the fees, all annuities have annual fees -- a contract fee, subaccount expense ratio, and mortality charge. All this should be spelled out in paperwork you receive or sign. I wondered if your quoted returns reflected the fees.

I don't know the quality and yield of the bonds.
I wouldn't think that you would care what the insurance company invested your money in, unless your annuities return was tied specifically to that investment.

I really got nothing to fully explain any of this, just a paper to sign and give how much I want to put in.
Danger, Will Robinson, Danger.

The major selling point was that I would never lose the principal I invested, which has happened to me with some mutuals.
Not wanting to lose principal is understandable. Investing in CDs will also solve the problem. When did this happen and what were you invested in? Did you suffer a paper loss, or did you sell and suffer a real loss? For example, I lost money, on paper, in my small-cap investments in the last few years while the S&P has racked up impressive gains.

Finally, what are you trying to achieve with your money?

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