Hybrid Annuity Caps:
There are three different ‘pricing controls’ an insurance company can place on a contract that are specifically meant to apply an interest credit that’s in line with the net gain from the option. Depending on the company or product you are considering, you may see one or more of these terms.
Participation Rate- This specifies the percentage of the index growth available for credit to the account. Example- a 10% gain in the S&P Index in a contract with a 50% participation rate means you would be credited with a 5% gain to your account value.
Cap Rate– Another option is to have a stated maximum level of interest, or a cap, available for account crediting. Example: A 5% cap rate means if the index goes up 10% and you have a 5% cap, you will be credited the 5%.
Spread- This is a fee imposed on the index credit that represents overall operating expenses for the insurance company. Example: In a year when the index gained 10% and you have 50% participation and a 2% spread, you would have 50% of the gain- 5%- and that 5% credited gain would be reduced by a 2% ‘spread’ charge. You would net 3%. In most cases, in years where there is no index gain, no spread is assessed, so you can’t go backwards.
Pricing Controls Summary:
Every annuity will apply one or more of these pricing controls. They have only so much income from the ‘fixed’ account to work with as an option investment, so it’s only logical that they would limit the amount of gain. These limitations are also explored in the page about Crediting Methods.
Remember, your money is NOT invested directly in the markets, and NOT subject to risk of loss. So don’t think that the insurance company is ‘taking’ anything away from you with their caps, participations, and spreads.
You are buying appreciation potential, AND downside protection. Downside protection necessarily comes at some cost.
Of course, we’re ready to assist you picking the best contract for your needs. Simply give us a call.
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