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.