DEFINITION OF ‘ANNUAL CREDITING CAP’
The maximum rate of index growth that an annuity will be credited over a specific time period. The annual crediting cap is an interest crediting method, and applies to annuities whose value is linked to a specific index, such as an equities index. It is most likely to be a feature of an indexed annuity contract.
INVESTOPEDIA EXPLAINS ‘ANNUAL CREDITING CAP’
An indexed annuity is a contract between an investor and an insurance company that allows the contract to increase in value through returns linked to a specific index, such as the S & P 500. The contract can contain features that protect the principal and provide for a minimum rate of growth, but also often contain features that cap the level of returns that can increase the value of the contract during the accumulation phase. These limits are outlined in the terms and conditions of the contract at signing. Many annuity contracts provide a minimum rate of interest – typically a low rate – though this rate can be adjusted over time depending on the contract language.
If an index’s rate of growth exceed the annual crediting cap – even by a fraction of a point – the contract’s interest will be set the same as the annual crediting cap. For example, if the annual crediting cap on a fixed income annuity is set at 6% and the value of the index increases by 7%, the contact will only be credited 6%. The 1% difference between the actual value and the capped value is not attributed to the contract. Any growth rate below the annual crediting cap will be credited to the contract. So if the annual crediting cap is set at 6% and the value of the index grows by 4%, the annuity contract will be credited 4%.
Indexed annuities may also vary in how they calculate interest. Common methods include annual reset and point-to-point.