Interest Cap

Indexed annuities credit a level of interest to the contract owner, and this level of credited interest is indexed or linked to the performance of equity markets. Interest caps or cap rates limit the level of interest that is credited to the owner of a fixed indexed annuity. Interest caps may result in a final level of credited interest that is less than the crediting method result. For example, assume that a given crediting method results in an 12 percent interest credit. If the interest cap is 10 percent, then the indexed annuity owner’s credited interest is limited to 10 percent despite the fact that the reference index and crediting method resulted in a 12 percent return. In addition, participation rates may also come into play and further reduce the level of credited interest. For instance, assume in the example above that the participation rate is 80 percent. In this case, the final level of credited interest would be 8 percent (80 percent of the 10 percent interest cap) which is 33 percent less than the 12 percent crediting method result.