Ins Company Free Reign to Change Cap Rates?
- Thread starter MartinJ
- Start date
- 11,457
Depends on the index segment and crediting period being discussed.
If we're talking about a 1-year point-to-point, then it is based on the annual yield of the underlying portfolio and the costs of purchasing stock options for the given index.
Let's assume a 3% yield as an example. 97% of the funds are put into the general account and 3% are used to purchase stock index call options.
If the index has grown from the beginning of the segment to the end of the 1-year point-to-point, the interest is credited - subject to cap, which is incorporates the expense and the strike price of the option.
If the index is flat, then the remaining 97% of the balance grew by 3% to equal 100% principal balance.
As bonds and interest rates rise, we should see a corresponding increase in the cap rates and other factors.
That's the mechanics of it - although there is 100% principal protection at all times. But these contracts, while they don't necessarily have HARD costs (other than optional income benefit riders), they do have more expenses, which is reflected in the surrender charge schedule compared to variable or traditional fixed annuities.
If you're looking at 2 year or longer segments, there are more creative ways to credit interest - that I've seen, but I generally prefer 1-year point-to-point interest strategies.
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How Options work with Fixed Indexed Annuities:
If we're talking about a 1-year point-to-point, then it is based on the annual yield of the underlying portfolio and the costs of purchasing stock options for the given index.
Let's assume a 3% yield as an example. 97% of the funds are put into the general account and 3% are used to purchase stock index call options.
If the index has grown from the beginning of the segment to the end of the 1-year point-to-point, the interest is credited - subject to cap, which is incorporates the expense and the strike price of the option.
If the index is flat, then the remaining 97% of the balance grew by 3% to equal 100% principal balance.
As bonds and interest rates rise, we should see a corresponding increase in the cap rates and other factors.
That's the mechanics of it - although there is 100% principal protection at all times. But these contracts, while they don't necessarily have HARD costs (other than optional income benefit riders), they do have more expenses, which is reflected in the surrender charge schedule compared to variable or traditional fixed annuities.
If you're looking at 2 year or longer segments, there are more creative ways to credit interest - that I've seen, but I generally prefer 1-year point-to-point interest strategies.
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How Options work with Fixed Indexed Annuities:
Last edited by a moderator:
- 10,703
They can follow whats in the contract. It will state what the Minimum Cap is. They are free to lower it to that at any time.
However, most carriers will never do that. If they did, agents would never sell their products again. Also, some carriers have excellent track records for keeping Caps at competitive rates.
Caps are based on interest rates. So rising rates (which most economists feel will happen over the next decade) will only make it less and less likely that Caps will decrease drastically.
Also, some products offer a "Bail Out" Cap Rate. This allows you to withdraw all funds (including the gains) free of early withdrawal penalties, if the company lowers the Cap below a certain threshold. There are Bail Out Rates in the 4% range with some products.
However, most carriers will never do that. If they did, agents would never sell their products again. Also, some carriers have excellent track records for keeping Caps at competitive rates.
Caps are based on interest rates. So rising rates (which most economists feel will happen over the next decade) will only make it less and less likely that Caps will decrease drastically.
Also, some products offer a "Bail Out" Cap Rate. This allows you to withdraw all funds (including the gains) free of early withdrawal penalties, if the company lowers the Cap below a certain threshold. There are Bail Out Rates in the 4% range with some products.
