What is a Participation Rate?

Shawn Plummer

CEO, The Annuity Expert

What is a participation rate? A participation rate is the percentage of a stock market index return an annuity owner receives in a fixed indexed annuity.

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.

Understanding The Indexed Annuity Participation Rate

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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 that will be credited to your contract.

Participation Rate vs. Capped Crediting Method

A cap limits the maximum amount of the 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 that the index rose by 7%.
    • The annuity would receive 3.5% increase in interest.

Annuity Spreads

In some annuity products, after application of the participation rate, a spread also may be deducted.

Just 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.

The participation rate crediting method may result in more interest credited to a contract than capped crediting methods when index returns are high.

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.

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Conclusion

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.

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At The Annuity Expert, we strive to help you make confident financial decisions regarding annuities. Content provided is created by an independent licensed financial professional.

The Annuity Expert is an online insurance agency that provides the widest variety of annuities in the United States. When you buy an annuity directly from us, we receive a predetermined commission from the insurance company (not you). While your annuity is active, clients are not charged any servicing or management fees. Learn more.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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