What is Cap Rate?
A cap rate is the maximum interest credit a fixed index annuity (FIA) will pay in a given crediting period, no matter how high the underlying market index returns. If the S&P 500 returns 18% during your crediting year and your contract has a 7% cap, your annuity is credited 7% – the gain above the cap is the insurance company’s margin.
How Cap Rates Work
Caps typically reset every contract anniversary. If the index loses value, your contract is credited 0% (the floor) but never less – your principal stays intact. Caps usually range from 4% to 12% on fixed index annuities, depending on the carrier, the index used, and the crediting method. Higher caps are usually paired with lower participation rates or higher spreads.
Why Caps Move
Insurers set caps based on the cost of options on the underlying index plus their own margin. When interest rates rise or option volatility falls, caps tend to go up. When rates fall, caps shrink. That’s why two clients buying the same FIA product six months apart can have very different caps. Always compare today’s cap with the contract’s guaranteed minimum – the cap can be reset annually, but the minimum is locked.
