Retirement · Annuities
What is a spread
in an indexed annuity?
A spread is a percentage subtracted from the index result before interest is credited to your contract. If the index measurement is eight percent and the spread is two percent, six percent is what the crediting formula works from. It is one of three ways a contract limits what the index move is worth to you.
Quick answer
- A spread is a percentage subtracted from the measured index change before interest is credited.
- It is sometimes called a margin or an asset fee, and it means the same thing.
- A cap sets a ceiling on the credited rate. A spread takes a slice off the top of whatever the index did.
- A participation rate credits a share of the move rather than all of it.
- A contract can use one of these, or more than one at the same time. Read which apply to yours.
- A spread bites hardest in a modest year: if the index moves less than the spread, the credited interest can be zero.
- Spreads, caps and participation rates vary by contract and carrier and often reset at each anniversary.
The three limits, side by side
Spread
Subtracts a fixed percentage from the index result. Index up 8 percent with a 2 percent spread leaves 6 percent to credit. In a year the index moves 2 percent or less, a 2 percent spread leaves nothing.
Cap
Sets a ceiling. Index up 12 percent with a 6 percent cap credits 6 percent. In a modest year the cap never comes into play at all.
Participation rate
Credits a share of the move. Index up 10 percent at a 60 percent participation rate credits 6 percent. It scales with the size of the move rather than cutting a fixed slice.
When each one actually hurts
A cap costs you in a strong year and costs you nothing in a weak one. A spread is the reverse: it is barely noticeable in a strong year and it can take the entire result in a flat one. A participation rate scales with the move, so it is felt proportionally in both.
That is why comparing two contracts on a single number is misleading. A contract with no cap and a spread is not automatically better than one with a cap and no spread. It depends on what the index does.
Why the numbers can change
Caps, spreads and participation rates are usually declared for a term and reset at each contract anniversary, within limits the contract sets. A rate that looks attractive in year one is not a promise about year five, and the contract will state the guaranteed minimum cap or maximum spread the carrier cannot cross.
Ask for that guaranteed limit, not just the current rate. It is the number that tells you the worst the contract is allowed to get.
What to ask
Which of the three applies to my contract, what is the current figure, what is the guaranteed limit, and when can it change. Four questions, and the answers are in the contract. We will read it with you if you want, whether you bought it from us or not. The product overview is on the annuities page.
Frequently asked questions
What is a spread in an annuity?
A percentage subtracted from the measured index change before interest is credited. If the index measures eight percent and the spread is two percent, the formula works from six percent.
Is a spread the same as a fee?
It is not deducted from your account value like a fee. It reduces the interest credited. The effect on your result can be similar, which is why it is sometimes called a margin or an asset fee.
Is a spread better or worse than a cap?
Neither in the abstract. A cap limits a strong year and costs nothing in a weak one. A spread is barely felt in a strong year and can take the whole result in a flat one.
Can the spread change?
Usually yes, at each contract anniversary, within limits the contract sets. Ask for the guaranteed maximum spread, not just the current one.
Can a spread make my credited interest zero?
Yes, if the index result is smaller than the spread. In a fixed indexed annuity the floor still means index performance alone does not reduce your principal.
Educational content only. Annuities are long-term contracts with surrender charges. Read the contract before purchasing. Crediting methods, caps, spreads and participation rates vary by contract and by carrier, and any guarantees depend on the claims paying ability of the issuing insurance company.
Have the contract in front of you?
We will read the crediting terms with you and tell you what they actually do, whether you bought it from us or not. Start with the annuities overview, or call +1 (586) 899-1003.
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Sources
Your contract and its product disclosure are the authority on the terms described here.
Educational content only.