What is an Annuity Cap?
Similar to a participation rate, a Cap is a way for the annuity company to skim off some of the bonus growth that an annuity acquires. The most common place you will see a Cap in a fixed annuity is with equity-indexed fixed annuities.
Many insurance companies offer an equity-indexed annuity strategy that has 100% participation in market upswings, but places a Cap, or maximum interest rate that the annuitant can acquire. The Cap is simply that, a maximum rate that the insurance company is willing to pay.
If an insurance company has a Cap of 7%, and the market increases 12%, the annuitant will only enjoy market increases of the 7%. These accounts will generally have a minimum interest rate as well, and will almost never allow a negative interest rate. This allows the annuity owner to enjoy preservation of capital, as well as participation in market upswings.
Accumulation Period vs. Liquidation Period
Another key term that you should be familiar with when exploring fixed annuities is the accumulation and liquidation periods of the annuity. The concepts are quite simple and don't need extensive explanation.
The accumulation period comes into play with deferred annuities. The accumulation period refers to the time that the annuitant or investor deposits money with the insurance company. This period covers the time spent funding the annuity.
The liquidation period simply refers to the period of time in which the payments are made by the insurer to the investor. The insurer begins to "liquidate" the annuity's funds to the designated recipient.
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