A participation rate is the percentage increase in the market value of the index used to determine the amount of indexed interest to be credited to a contract holder. The contract's stated participation rate is multiplied by the amount of increase in the index value to determine the indexed interest. For example, when the S&P 500 value increases 10 percent, an indexed annuity with an 80 percent participation rate will receive indexed interest credit of 8 percent. However, participation rates vary widely, with some companies offering 50 percent and others offering 100 percent or more.
An index annuity's minimum guaranteed interest rate is usually either a 90 percent or 100 percent guarantee of the contract holder's invested principal, with a 3 percent annual interest credit. This can vary by insurance company or contract.
Participation Rates, Caps and Spreads depend directly on the mechanical structure of interest yields of bonds and the pricing index option. Lower yields and more volatile markets decrease the amount of options that can be bought, thus lowering overall returns in an indexed annuity.
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