The Indexed Annuity: 3 Key Terms Defined

Investing in an indexed annuity can provide you with a way to gain exposure to the stock market without taking on as much risk. Here are a few key terms that you will want to understand if you are going to invest in an indexed annuity.

1. Participation Rates

With many equity indexed annuities, you find participation rates. This is the rate at which the annuity provider is going to participate in the movement of the financial index. For example, if the participation rate of your annuity is six percent, and the index moves 10 percent, you are only going to get six percent in your account.

2. Margin

Many insurance companies also charge a margin on the returns that you earn in your account. For example, if the margin is two percent and you earn 10 percent in your account, you will actually get to keep eight percent.

3. Interest Rate Caps

Many equity indexed annuities also have interest rate caps. This means that there is a maximum amount of interest that you can earn, regardless of how well the underlying financial index performs. If your interest rate cap is 7 percent, you are only going to earn 7 percent because that is where the cap was established.

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