An annuity spread is an important part of an indexed annuity contract. This term refers to the difference between the interest rates earned on the money that is put into the annuity and the interest rates paid out to insurance companies. When you are shopping for an annuity, it is important to understand how this spread affects your payments. In this guide, we will discuss what annuity spreads are and how they can impact your retirement savings!
Indexed Annuity Spreads
A spread (margin) is the portion of the unadjusted interest rate (determined from the index strategy) that is subtracted before being applied to the funds allocated to the index strategy.
A spread reduces the amount of interest credited. Some indexed annuities have a participation rate as well as a spread.
For example, suppose that an insurance company imposes a one percent spread under its indexed annuity contracts but no other limitation (participation rate or cap). If the unadjusted index interest rate was 10 percent, the actual interest rate applied would be nine percent (10% – 1% = 9%).
The guaranteed spread is set at the time of annuity issuance and cannot be increased by the insurer before the end of the index term.
When a spread is nonguaranteed, the insurance company may increase it at any time and thereby lower the contract owner’s effective index interest rate.