A fixed indexed annuity does not pay the index change itself. The contract runs that change through one or more limits. The three limits consumer bulletins actually walk through with numbers are the participation rate, the cap, and the spread. This page uses only those published hypotheticals. It does not survey products, and it does not know what a contract offered this month will offer next year.
Participation rate
A participation rate is a percentage of the index change that the formula uses. The SEC’s July 31, 2020 bulletin gives this illustration: a 75 percent participation rate applied to a 10 percent index change produces 7.5 percent. The other 2.5 percentage points of index change are not credited. A participation rate under 100 percent is a reduction. A rate over 100 percent would multiply the index change, but this site will not claim that any contract offers that, because the SEC example used here is 75 percent and a live contract might say something else.
The participation rate in the first term is not automatically the participation rate in the second term. FINRA’s July 14, 2022 article says the insurer may change these limits later. “May” is doing real work. Some contracts guarantee a minimum participation rate. If yours does, the guarantee is a sentence in the contract, not a sentence on this page.
Cap
A cap is a ceiling on the credit for the term. The SEC’s illustration: if the cap is 7 percent and the index rises 12 percent, the credit is 7 percent. FINRA used the same pair of numbers in 2022 — a 12 percent index change and a 7 percent cap — as its own hypothetical. Both agencies are showing arithmetic, not a market average and not a product that is available in any particular state.
A cap does nothing in a term when the measured index change is already below the cap. If the measured change is 3 percent and the cap is 7 percent, the cap is not the thing that sets the credit; the 3 percent is, unless a participation rate or a spread also applies. If the measured change is negative, a cap does not create a positive credit. The separate rule, from the NAIC buyer’s guide, is that a down index typically means a zero credit for that term if you do not withdraw. Zero is below any positive cap.
Spread, margin, or asset fee
A spread (also called a margin or, in some contracts, an asset fee) is a percentage subtracted from the index change. The SEC’s illustration: a 3 percent spread on a 9 percent index change leaves 6 percent. FINRA’s 2022 article uses a separate illustration: a 3.5 percent spread on a 10 percent index gain. Applying that spread the same way the SEC applies its spread gives 6.5 percent. That 6.5 percent figure is the arithmetic of FINRA’s hypothetical inputs. It is not an average return, and it is not what you should expect next year.
The SEC also stacks two limits in one illustration: a 75 percent participation rate and a 3 percent spread, applied to a 10 percent index change. Seventy-five percent of 10 percent is 7.5 percent, and subtracting the 3 percent spread leaves 4.5 percent. Again, this is the bulletin’s example. Your contract might use a cap instead of a spread, or a cap and a participation rate together. Read the declarations page rather than assuming the stacked example is your formula.
Dividends are a limit of a different kind
Before a cap or a spread is applied, the index change itself may already exclude dividends. The SEC’s illustration: if the total return were 7 percent and dividends were 2.5 percent, many indexed annuities would measure 4.5 percent. Say that sentence the way the SEC framed it. It is an illustration of what “many” formulas measure. It is not a statement that indexed annuities yield 4.5 percent.
Why this page has no “current rates”
Caps, participation rates, and spreads are declared by the insurer for a term. They differ by contract, by index, by method, and by year. Publishing an average would either be invented or immediately stale. FINRA’s point about later changes is the practical one: a renewal can be less favorable than the term you were shown. Ask what is guaranteed for the life of the contract and what is guaranteed for one term only. Ask whether a bonus, if the contract has one, is paired with a lower cap. This site does not know the answer for a contract it has not read, and it will not guess a bonus percentage either. See bonuses.
How to read a number in a brochure
If a brochure shows an index up double digits and a credit that is lower, the gap is the point of the cap or the participation rate, not a printing error. If a brochure shows a long period of positive credits with no zero years, ask whether those are hypothetical and whether the index actually rose every year in that picture. Hypothetical results are allowed to be hypothetical. They are not a sample of what owners received, unless the brochure says it is history and shows the method that was in force, including renewal changes.
Bring the brochure to the crediting methods page in your own notes: write down the index, the term length, the method, and which limiter applies. Then write down the surrender schedule from the surrender page’s checklist. A high cap in year one does not shorten a ten-year charge.
Sources
- U.S. Securities and Exchange Commission, Updated Investor Bulletin: Indexed Annuities (July 31, 2020)
- FINRA, The Complicated Risks and Rewards of Indexed Annuities (July 14, 2022)
- National Association of Insurance Commissioners, Buyer’s Guide for Deferred Annuities (revised 2013)