Some annuities have different strategies in which you can earn interest. They usually use the S&P 500 as a benchmark, and are almost always limit your gains with caps, spreads, or a participation rate.
A cap is the maximum rate of interest that can be credited to an indexed interest strategy for a term period, while a participation rate is the maximum percentage of indexed interest that you would receive within a term period.
For example, I have a new annuity through American National Insurance that offers a maximum 70% participation rate over a 5 year term. It ties to the S&P 500. So if over the next 5 years the S&P 500 increases by 100%, your account would be credited with 70%. However, if the S&P 500 only went up 5%, your account would only earn 3.5%. With most fixed indexed annuities, if the index declines in value during the term period, your account will not lose its value. Instead, it would receive a zero for the term.
Some annuity contracts contain a minimum guarantee of 1% or 2%, so even if the stock market goes down, your policy is still credited with interest. These are my favorite contracts because no matter what happens, you can’t lose.
Cuidado: Careful! Caps, spreads, and participation rates are usually not guaranteed for the life of the annuity contract. Your cap may be at 8% this year, but it could drop to 7% next year, as most caps are restated annually.
If your participation rate has dropped recently, call me to see if I can offer you something better, at 619-564-4873.
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