Participation Rate

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. Participation rates determine the final level of interest that is credited to the owner of a fixed indexed annuity. Participation rates are applied to the various crediting methods and 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 8 percent interest credit. If the participation rate is 70 percent, then the final level of interest credited to the contract owner is 5.6 percent (70 percent of 8 percent). Participation rates vary greatly across different indexed annuities. Participation rates can also change frequently or be guaranteed for a period of time. Indexed annuity owners need to pay attention to their participation rates and understand when and how frequently the rates change as their return is ultimately determined by the participation rate.

Lack of Dividends Make Equity Indexed Annuities a Tough Sell

Dividends contributed five percent of the 7.9 percent total return from stocks over the 200 year period from 1802 through 2002.

Dividend paying stocks in the S&P 500 produced an average return of 8.92 percent since 1972.  Over that same roughly 40 year period, non-dividend paying stocks in the same index returned 1.83 percent.

Most equity indexed annuities only count market price gains in their reference index when crediting...

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Part Two of the Interview with Wharton Professor David Babbel

This is the second part of an interview with Professor David Babbel.

Part one can be found here.