What is a cap, participation rate, and spread?

These are ways the insurer limits indexed-crediting upside. A cap is the maximum credit in a period. A participation rate is the share of the index gain you receive. A spread is an amount subtracted from the index gain before crediting.

Can I really not lose money?

Fixed indexed annuities protect against index losses through a floor, typically zero percent. You will not lose principal due to a negative index return, but fees, riders, or withdrawals during the surrender period can reduce your account value.

Fixed Indexed

Growth tied to an index, with a floor.

A fixed indexed annuity credits interest based partly on the performance of a market index, such as the S&P 500. The contract includes a floor, which means the account value does not decline due to a negative index period. In exchange, upside is limited by caps, participation rates, or spreads.

Index-linked growthDownside floorCap/par/spread

Crediting mechanics

Caps, participation, and spreads

Cap rate

The maximum interest credit the insurer will apply in a crediting period, no matter how high the index rises.

Participation rate

The percentage of the index gain the insurer credits to the contract. A 70% participation rate means you receive 70% of the index return.

Spread / margin

A deduction taken from the index gain before interest is credited. If the spread is 2% and the index gains 8%, the contract credits 6%.

Red flags to review

• A cap or participation rate that is much lower than competing products.
• A long surrender schedule that does not match your liquidity needs.
• Income riders or benefit bases with fees you do not fully understand.
• Confusion between the account value and an income-only benefit base.

Frequently asked questions

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Annuities are insurance products, not bank deposits. Guarantees are subject to the claims-paying ability of the issuing insurer. Withdrawals before age 59½ may be subject to a 10% federal tax penalty. Products, rates, and availability vary by state and change without notice. This page is educational, not a recommendation to buy, sell, or exchange any product.