A spread (also called a margin or asset fee) is a fixed percentage subtracted from the index gain before interest is credited to a fixed index annuity. If the index gains 10% and your spread is 3%, your contract is credited 7%. Spreads are an alternative or supplement to caps and participation rates.
How Spreads Work
Unlike a cap, which limits your upside in strong years, a spread takes a flat percentage regardless of how high the index goes. If the index returns 25% and your spread is 3%, you receive 22%. If the index returns 4% and your spread is 3%, you receive 1%. In a flat or down year, the spread does not create a negative credit – you receive the 0% floor instead.
When Spread Strategies Make Sense
Spread crediting tends to favor accounts that experience strong, consistent gains. The wider the spread, the more years of weak market performance will leave you at 0%. A 3% spread is moderate; some products carry 5-7% spreads on aggressive uncapped strategies. Always compare the spread against the index’s typical return before committing.
