The best indexed annuity policies offer the highest participation rates. Higher rates give you the opportunity for larger gains when the index you’ve chosen performs well.
Not all indexes are created equal, however. There are several nuances that will affect your total returns. This post discusses what to look for regarding annuity participation rates.
What Is An Annuity Participation Rate?
In a nutshell, it’s the percentage the insurance company uses to calculate your overall gain in any chosen index. It is declared yearly by the insurer and usually applies to a 12 month term.
For example, if your declared participation rate is 80% and your chosen index increases by 10% for the 12-month term, then you receive an 8% interest credit for that year. In other words, 80% of 10 equals 8%. That gain is then locked in, the 8% interest rate credited to your account, and it resets for the next year.
Can Participation Rates Change Or Be Capped?
Yes, participation rates can move up or down and generally reflect the overall interest rate environment. When interest rates are up, you can lock in higher participation rates with most indexed annuities. And yes, they can change year over year as overall rates fluctuate.
Insurance companies can cap your growth as well, but that is rare. If in the example above, there was a 7% cap, then the annuity would credit 7% instead of 8%. It’s best to find a policy with the highest participation rates and no earnings cap.
Why Are Some Rates Above 100%?
The S&P 500 is most commonly tracked with indexed annuities. You might also see the Dow Jones, NASDAQ, or Russell 2000 offered as options as well.
All indexed annuities offer several subaccounts. Many track well know indexes, while others track funds and/or commodity prices. There are others using proprietary indexes managed by large investment firms like Blackrock, JP Morgan Chase, and Credit Suisse among others. Some track gold while others will credit interest when the market goes down.
It’s advantageous to invest in an indexed annuity with several different subaccounts and a strong fixed account. In many cases, proprietary indexes will outperform standard ones simply because of the higher participation rates offered.
In fact, many proprietary indexes offer participation rates well above 100%. If your participation rate was 150% and the 12 month gain was 8%, you would be credited 12% for the year. Put another way, 8% multiplied by 150% participation rates equals a 12% gain for the year. These are the kinds of gains you’re looking for with indexed annuities.
A Small Example Of Comeptetitive Participation Rates
|Company||Product||Index Tracked||Length||Participation Rate||Cap||More Information||Contact Us|
|SILAC Life||Denali 14||S&P 500||1 Yr||100%||14.50%||Download Brochure||Request Consult|
|ASPIDA Life||Synergy Choice Max||S&P 500||1 Yr||100%||11.00%||Download Brochure||Request Consult|
|American National||ASIA Plus||Nasdaq||1 Yr||100%||9.00%||Download Brochure||Request Consult|
|EquiTrust Life||MarketValue Index||Barclays Focus50||1 Yr||175%||None||Download Brochure||Request Consult|
|American Equity Life||FlexShield 10||BofA Destinations||1 Yr||235%||None||Download Brochure||Request Consult|
|American Life||American Select 10||Goldman Sachs Xenith||2 Yr||275%||None||Download Brochure||Request Consult|
|Lincoln Financial||OptiBlend 10||BlackRock Dynamic||2 Yr||285%||None||Download Brochure||Request Consult|
|AIG Life||Power 10 Protector||Dimensional US||2 Yr||300%||None||Download Brochure||Request Consult|
|Nationwide Life||Peak 10||BNP Paribas Global||2 Yr||325%||None||Download Brochure||Request Consult|
|Sentinel Life||Accumulation Protector||Credit Suisse Momentum||3 Yr||550%||None||Download Brochure||Request Consult|
Please know that there are hundreds of indexed annuities offering all kinds of indexing options. They change often and increase or decrease based on fluctuating interest rates. The chart above lists some of the most popular and competitive rates at present.
Can I Buy Up? How Long Are The Terms?
There are also indexing accounts that offer higher participation rates for a fee. A no-cost account might have a 75% participation rate while one with an annual 1% charge might offer a 12% rate. When the economy is doing well, it can be advantageous to buy up and take advantage of the highest participation rates for that term.
It’s also worth noting that some policies offer subaccounts that do not credit interest for 24-36 months. (Examples are in the chart above.)
Longer-duration options typically offer the highest participation percentages. For example, a 12 month term might have a participation rate of 100% while a 24 month term could offer a 250% rate.
There are pros and cons to both shorter and longer terms. As it’s hard to time the market, many of our clients might put a portion of their dollars in each account in order to lock in more consistent gains.
Is Now A Good Time To Invest In An Indexed Annuity?
The best time to purchase a fixed income annuity is when rates are high. The second part of the equation is to lock in these higher rates while overall markets are down. This gives you better opportunities for future growth
Most indexed annuity policies are 5-10 years in length with subaccounts that could be 12-36 months within that 5-10 year term. There are several offering premium bonuses as well. Others might also offer lifetime income payments, leveraged long term care payouts, and/or a death benefit that’s guaranteed to grow each year.
We can help you compare your best options depending on your investment goals and needs.