A cap rate is the ceiling on interest credited in a fixed-indexed annuity for a crediting period. If the cap is 6% and the index rises 12%, the credited interest is limited to 6%; if the index rises 4%, you receive 4%.
Caps are one of the trade-offs for the contract's downside protection. They are set by the issuing insurance company and may change over time within contract limits.
Example
A contract with a 6% annual cap credits 6% in a strong market year and 0% (not a loss) in a year the index declines.
This definition is for general educational purposes only and is not financial, tax, or legal advice. Tim Hartle is an independent insurance professional. Annuity guarantees are subject to the claims-paying ability of the issuing insurance company and are not FDIC insured. Rules and product features vary by situation and by state. Please consult a qualified advisor about your own circumstances.