What is a cap rate in a fixed indexed annuity?

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A cap rate is typically the maximum rate of interest a fixed indexed annuity will earn during an index term. It is one of the ways an insurance company may limit how much of an index increase is credited to your annuity. In a fixed indexed annuity, money earns interest based on changes in an index over a set period of time called the index term. The insurance company uses a formula to determine how a change in the index affects the amount of interest added at the end of that term. The formulas often mean that the interest added is based on only part of the change in the index, not the full change. A cap rate is one of the terms used to describe that limitation. The NAIC explains that companies often use a cap rate, especially if the participation rate is 100%. Some annuities also guarantee that the cap rate will never be lower or higher than a stated minimum or maximum. If the index goes down over the index term, zero interest is added to the annuity. That means the annuity value will not go down as long as you do not withdraw the money. Also, when you buy an indexed annuity, you are not investing directly in the market or the index. Because indexed annuities can use different formulas and limits, it is important to read the contract and disclosure carefully and ask how the cap rate works for the specific annuity you are considering.