Annual Crediting Cap
In the world of insurance industry, money is always running in circles. The insured and the insurer are both benefited in this business. However there are things that are not be considered by both parties.
One important discussion in most insurance companies today is the Equity Index annuity and its crediting cap included in the insurance company’s policies. Equity Index annuity is a tax type of annuity contract from an insurance company or annuity company in which the return is tied to the increase in one of the several stock market indexes such as the S&P 500. You do not lose any of you money if the market goes down. In addition, it guarantees a minimum interest rate of approximately between 1percent -3 percent even if the index you invested in would go down and protects against the loss of principal. The returns of equity index annuity may be higher than fixed instruments such as CD and bonds but not as high as market returns. The insured in the contract will always be backed up with the strength of the insurer.
The main purpose of purchasing an equity index annuity is to let people realize the greater gains compared to those provided by money markets and bonds while protecting the principal.
Equity Indexed Annuities is also known as Fixed Indexed Annuities usually carry a surrender charge for early withdrawal. These periods would cover approximately between 3 to 16 years but usually about 10.
The indexed annuity and fixed annuity are most likely identical except in the way their interests are being calculated. Take for instance, an interest credit of $5000. It should be reminded that equity indexed annuity’s interest credit is linked to the equity markets. If in case the index of S&P 500 offers an annuity cap of 8 percent and your principal amount of probably $100,000 could credit of anything between 0- 8 percent based on the S&P. In this situation, the owner is secured knowing that the $100,000 is safe and instead of receiving 4 percent they can receive up to 8 percent. In addition, the return may be adjusted by different factors such as the market value adjustments and the participation rate adjustments to cover to bring the cost of the option on to what budget is available.
The annual crediting cap of the equity index annuity is the maximum rate that limits the amount of interest you might earn for a year. Annuities with this kind of feature may have other product features that you may want to do such as taking partial withdrawals or annual interest crediting. It should also be noted that annuities may have higher participation rate.
Annuities may put an upper cap or limit on the index-linked interest rate. For instance, if a contract has an upper limit of 8 percent cap rate, 8 percent, and not 8.5 percent would be credited to the annuity. However not all annuities have a limit rate.