When it comes to fixed indexed annuities, one of the most important terms you’ll want to know is the “participation rate.” But what is it, exactly? And why is it so important? This guide will explain everything you need to know about participation rates in annuities. We’ll cover what they are, how they work, and why they’re essential when choosing an annuity. By the end of this post, you’ll have a better understanding of participation rates and why they matter when shopping for an annuity. So let’s get started!
The participation rate of an indexed annuity contract is the percentage of the index interest rate that is applied to the funds allocated to the index strategy.
What Are Participation Rates?
The participation rate of an indexed annuity contract is the percentage of the index interest rate applied to the funds allocated to the index strategy.
Example
In a fixed indexed annuity with an 80 percent participation rate, an 8 percent interest rate would be credited to the funds if the return is 10 percent.
10% (total return) x 80% (participation rate) = 8% Interest Rate Credited
Who Are Participation Rates Designed For?
For investors that want to grow their retirement savings, but do not want to lose money due to a stock market crash, a participation rate in a fixed indexed annuity will be a great option. This allows annuity owners to earn interest based on positive changes to a stock market index, such as the S&P 500. And there is no loss in the annuity’s value if the index falls because the retirement plan is not invested directly in the stock market.
How A Fixed Indexed Annuity Participation Rate Works
First, the index return is calculated. This means looking at the index price change over a specific time period, for example, one year. Then the index return is multiplied by a participation rate to determine the amount of interest credited to your contract.
Participation Rate vs. Capped Crediting Method
A cap limits the amount of index earnings an annuity owner can receive. However, the participation rate is credited with a percentage of the total index increase without a cap.
An example of a participation rate.
- Let’s assume an annuity owner has a 50% participation rate with an index strategy.
- At the end of each reset period, the insurance company will calculate that period’s percentage increase in the index price.
- The contract would be credited with 50% of that percentage increase.
- For example, if a fixed indexed annuity had a 50% participation rate, let’s suppose the index rose by 7%.
- The annuity would receive a 3.5% increase in interest.
Annuity Spreads
Some annuity products may deduct a spread after applying the participation rate.
As in all interest-crediting methods, if the change in the index price multiplied by the participation amount and minus any applicable spread is 0% or less, 0% is credited to the contract. There would be no loss to the annuity’s value.
When index returns are high, the participation rate crediting method may result in more interest credited to a contract than capped crediting methods.
However, in environments with lower index returns, an annual point-to-point with a capping method offering a 100% participation rate may result in more credited interest.
Next Steps
A deferred fixed-indexed annuity allows you to participate in positive changes to a stock market index. And because you’re not invested in the market, it protects you from loss when an index falls. So if you’re looking to grow your retirement savings, contact us about a fixed indexed annuity.
