When people search for the highest fixed index annuity growth rates, they usually focus on the biggest cap, participation rate, or premium bonus they can find.
But the rate you receive during the first year is only part of the story.
What matters just as much is renewal rate integrity is the insurance company’s history of keeping its caps and participation rates competitive after the contract has been issued.
A high starting rate may look impressive. However, it will not help much if the carrier significantly lowers that rate when it renews.
Need help choosing the best annuity for your unique situation? Have questions about getting an annuity? If so, it’s best to speak with an annuity specialist. Watch this short video to see how I can help you do this (at no cost to you!)
Tip: See how much an annuity could pay you using my annuity calculator
What Is Renewal Rate Integrity?
A fixed index annuity’s cap or participation rate may be renewed periodically, depending on the contract.
For example, suppose your annuity has a 200% participation rate and the selected index grows by 10%. Based on that simplified example, the contract could receive 20% interest crediting.
That sounds excellent. But what happens if the carrier sharply reduces the participation rate the following year?
When I compare fixed index annuities, I do not simply look for the highest rate available today. I look for companies with a history of renewing their caps and participation rates at or reasonably close to the original level.
That is what I mean by renewal rate integrity.
💡 Pro Tip: A slightly lower rate from a carrier with a strong renewal history may be more valuable than an unusually high rate that could be greatly reduced later.
Why the Highest Starting Rate Can Be Misleading
Some annuity illustrations show extremely high potential returns.
Those illustrations can make a product look almost impossible to beat. Unfortunately, the actual experience may be very different if the carrier lowers its rates after the first contract year.
You may also see a very high participation rate attached to a newer proprietary index. The index may have attractive back-tested results, but little real-world performance history.
That does not automatically make the index bad. It simply means you need to understand what is creating the illustrated return.
I generally prefer strategies connected to established indexes, such as the S&P 500, when the carrier also has a dependable renewal history.
I would rather recommend a realistic strategy that I believe can remain competitive than show someone an enormous illustrated return that may never materialize.
👉 Looking for a fixed index annuity with competitive growth potential? Schedule a call with me and I’ll help you compare the available options.
Cap Rates Versus Participation Rates
A cap places a maximum on the interest that can be credited during a particular period.
For example, if the index rises by 13% and your annuity has a 9.25% cap, the contract would receive no more than 9.25% under that strategy.
A participation rate determines what percentage of the index gain is used.
If the index rises by 20% and the participation rate is 50%, the interest credited would be 10%, subject to the contract’s terms.
Participation-rate strategies can perform especially well during strong market years because they may not impose the same ceiling as a cap.
Cap strategies may be appealing when market growth is more moderate. When the index reaches the cap, the contract receives the maximum available credit without needing an exceptionally strong year.
Because nobody knows what the market will do next, some people divide their money among multiple strategies. That could include:
- A cap strategy
- A participation-rate strategy
- A fixed-interest account
- More than one index
Personally, I tend to favor participation rates when I am optimistic about future growth. I would rather participate in more of a strong year than automatically be capped at a lower percentage.
However, the right allocation depends on your goals, timeline, and comfort level.
Watch for Bonuses, Fees, and Surrender Periods
A large premium bonus can make an annuity look very attractive.
But the insurance company must account for the cost of that bonus. In many cases, a product with a large upfront bonus may offer less growth potential through its future caps or participation rates.
If your primary goal is long-term accumulation, I would not choose a contract based on the bonus alone.
You also need to watch for strategy fees.
One American Equity offered a higher cap with a 1.5% annual fee. That fee could still be charged during a year when the index does not produce a positive credit.
Fee-based strategies can make sense when the additional growth outweighs the cost. The problem is that nobody knows in advance whether the market will cooperate.
The surrender-charge period also matters. A 10-year contract may provide a higher cap or participation rate than a five-year or seven-year contract because you are committing your money for longer.
Before purchasing an annuity, make sure you understand:
- The surrender period
- The available free-withdrawal provision
- Any strategy fees
- How often rates can be changed
- Whether a cap or participation rate is contractually guaranteed
The highest illustrated return is not automatically the best contract.
Carriers I Review for Renewal Rate Integrity
As of the time of this blog post, several companies stood out to me for their combination of competitive rates and renewal history.
These included:
- American Equity
- Delaware Life
- Lincoln
- EquiTrust
- GILICO
- Athene
- National Life Group
- Global Atlantic
Availability, ratings, caps, participation rates, and product terms can change. The following figures are examples from the illustrations reviewed in the blog, not promises of future performance.
American Equity
One no-fee American Equity example offered a 9.25% cap.
In the historical illustration shown, $750,000 grew to approximately $1.5 million over 10 years. During negative index years, that illustrated strategy received no index credit but also did not participate directly in the market decline.
American Equity also offered bonus and fee-based versions, but I preferred reviewing the simpler no-fee option for this comparison.
Delaware Life
The Delaware example offered an 11% cap and a 50% participation-rate option.
The participation-rate illustration grew $750,000 to approximately $1.639 million over 10 years.
Also note that, among approximately 70,000 policies, more than 88% had renewed at or above the previous rate. That type of renewal history is important when evaluating whether the original illustration may remain realistic.
Lincoln
Lincoln offered a 55% one-year point-to-point participation rate in the example reviewed.
The historical illustration grew $750,000 to approximately $1.77 million over 10 years.
I like the one-year reset because it gives the contract an opportunity to receive and compound interest each year. Lincoln also has a strong renewal history, which makes the illustrated rate more meaningful to me.
EquiTrust
The EquiTrust example included a 50% participation rate, a 10% cap, and several monthly crediting strategies.
One illustrated strategy grew $750,000 to approximately $1.697 million over 10 years.
I have also personally seen my EquiTrust clients receive double-digit credits during strong index years. One client received approximately 14% during this recent year.
That does not mean the client will earn 14% every year. I would never illustrate or present that return as an annual expectation.
Athene
Athene offered a 73% participation rate that was guaranteed not to change in the example reviewed.
However, it used a five-year point-to-point crediting period. That means interest was measured and credited only twice during a 10-year period rather than annually.
The historical illustration reached approximately $1.9 million, which was the strongest illustration in the comparison.
The tradeoff is that you must be comfortable waiting five years for each crediting calculation. Strong gains during the middle of the term could be reduced by weaker performance before the five-year period ends.
Global Atlantic
Global Atlantic offered strategies with caps guaranteed for a specific number of years.
One example included a 7.25% cap guaranteed for seven years. Another offered a lower cap that could be locked in for 10 years.
The projected return was not as high as some of the other illustrations, but the contractually locked cap provided greater certainty about what the strategy would offer in future years.
Annual Crediting Versus Five-Year Crediting
A high participation rate does not tell you how frequently interest will be credited.
With a one-year point-to-point strategy, the index value is generally compared at the beginning and end of each contract year. Any earned interest is then credited according to the contract terms.
With a five-year point-to-point strategy, the index is measured over the full five-year period.
The five-year strategy may offer a higher or guaranteed participation rate. However, it provides fewer crediting opportunities.
For example, you could experience three strong years followed by two weak years. If the weaker years reduce the index’s total five-year gain, the contract may receive less interest than you expected after seeing the earlier growth.
I generally prefer annual crediting because it gives the account more opportunities to lock in interest and begin compounding earlier.
That does not make a five-year strategy wrong. You simply need to understand the tradeoff.
Conclusion
Finding the highest fixed index annuity growth rate is not as simple as choosing the largest number on an illustration.
You need to consider the cap, participation rate, renewal history, selected index, crediting period, fees, surrender schedule, and financial strength of the insurance company.
You should also decide whether you are purchasing an annuity primarily for growth or income.
An income-focused annuity is designed to create contractual lifetime income. It may provide some account growth, but growth is not its primary purpose.
A growth-focused fixed index annuity is different. Its purpose is to earn index-linked interest while avoiding direct participation in negative index performance, subject to the contract’s terms, fees, and withdrawal provisions.
Need help with finding the best annuity for your retirement?
Click here to schedule a call with me.
On the call, I can help you:
- Determine what type of annuity is best for you
- Find the highest paying annuities for your unique situation
- Answer any other questions you may have