Fixed indexed annuities typically provide you with a choice of methods to possibly grow your money: An option for fixed interest rates using index-based options for crediting your interest on a cap or participation rate approach.
1. The Fixed-Rate Strategy
The fixed-rate strategy earns a guaranteed interest rate over one year. The interest rate is declared on the anniversary of your contract at the time you purchase your contract and yearly renews on the current new rate.
2. Index-Based Approaches
With index-based approaches, your money will rise according to one or more market indices, such as the S&P 500 ®. The interest rate that you can earn is usually calculated over a predetermined period and may vary based on the annuity features, including the option of allocating your money to a strategy based on a cap or participation rate.
A cap rate is an upper-interest limit that can be credited over the term. A participation rate is also an upper limit on what can be credited but is based on a percentage of the performance of the index. Cap rates and participation rates are fixed at the time of purchase and reset after each contract term.
The safety of a floor protects your principal and your earnings. The floor prevents a loss of value to your annuity even if the index decreases during your period. Your principal is protected, and any interest credited. You can’t lose money based on performance at the market.