Life Insurance Quotes

Indexed annuities

Unlike other types of annuity, Indexed annuities earn interest or provide benefits that are linked to external factors, such as equity indexes. Your return is based off of the increase of a stock, equity index, or whichever other financial body you’ve chosen.

However, unlike traditional investments which involve variable factors, if the stocks or index you’ve invested in drops, you don’t lose any money, though your interest rate may decrease. This is because most indexed annuities contracts guarantee a minimum interest rate, typically around 3 or 4 percent.

Rate Cap

The "rate cap" sometimes referred to as "cap rate" or simply "cap" is, if set, the maximum amount of index-linked return that, you can earn on your annuity. For instance, if your annuity specifies a 8% maximum index-linked return, if your index goes up 8.7% in the year, your annuity return will exclude the .7%, only awarding you 8%.

Participation Rate

Less than 100% of your index's interest rate gets passed through to you. Instead, you get a certain percentage, called your participation rate. This rate varies by company to company.

Example: suppose that the participation rate at your seller's company is 90%. This means that however much the index you’ve invested in goes up, your annuity will be credited 90% of the gain, as opposed to 100%. This means that if the entire index goes up 10%, your gain would be 9% for that year. Your company's participation rate is subject to change. Usually a guarantee is made to keep a certain participation rate for a year, and then the company will set a new rate. Some annuities guarantee a minimum participation rate.

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