What Does the Participation Rate Mean?

Some types of fixed annuities, most commonly equity-indexed annuities, have a participation rate associated with the contract.  These types of annuities provide bonus income based upon market upswings.  When the market is down, the contract maintains a minimum interest rate.  However, on market upswings, the account is credited according to the growth of the index.  In order to balance out down markets, the insurance company only allocates a portion of the growth to the annuitant.  This portion is called the participation rate.  Participation rates will generally range from 35% up to as much as 100%, though at 100% participation there is generally a cap (see article on a fixed annuity Cap).

Consider an annual point-to-point strategy on an equity-indexed annuity.  This strategy compares the S&P 500 value at the beginning of the year and the end of the year.  If the market increases 10% over this period, a 65% participation rate would credit the annuitant 6.5%.

Remember to discuss participation rates with your financial planner before purchasing a contract.  Not all annuities are created equal.