7.6.1.2 The Participation Rate
The participation rate decides how much of the increase in the index will be used to calculate index-linked interest. A company may set a different participation rate for newly issued annuities as often as each day. Therefore, the initial participation rate in the annuity will depend on when it is issued by the company. The company usually guarantees the participation rate for a specific period (from one year to the entire term). When that period is over, the company sets a new participation rate for the next period. Some annuities guarantee that the participation rate will never be set lower than a specified minimum or higher than a specified maximum.
If the participation rate is 80% and the stock market moves up 10%, the amount credited to the cash value is 8%. If the participation rate is 90% and the stock market moves up 10%, the amount credited to the cash value is 9%.
Some annuities may put an upper limit (CAP) on the index-linked interest rate. This is the maximum rate of interest the annuity will earn.
The floor is the minimum index-linked interest rate earned. The most common floor is zero percent. A zero percent floor assures that even if the index decreases in value, the index-linked interest earned will be zero and not negative.
Averaging
In some annuities, the average of an index's value is used rather than the actual value of the index on a specified date. The index averaging may occur at the beginning, the end, or throughout the entire term of the annuity.
Margin or Spread
In some annuities, the index-linked interest rate is computed by subtracting a specific percentage from any calculated change in the index. This percentage, sometimes referred to as the margin, spread, or administrative fee, might be instead of, or in addition to, a participation rate.
