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Explaining Annuity Crediting Strategies: Participation Rate Strategy

A fixed indexed annuity (FIA) is a type of fixed annuity that uses the performance of an index to determine the interest that gets credited. A key characteristic that makes fixed annuities attractive is that they will not lose money from market performance. An FIA is no different, even though its interest is tied to an index.

Because these annuities promise that they will never lose money, the trade-off is that insurance companies must limit the upside potential. The different ways of calculating the interest based on the performance of the index are also known as crediting strategies.

Each crediting strategy has characteristics that affect how much the interest will be. These and other variables influence what fits the goals of the annuity buyer. Common crediting strategies include cap, participation rate, spread, monthly average, and monthly sum.

The crediting strategies can be used on a variety of different indices. Some of the indices are common ones that most people are familiar with, like the S&P 500 or the Russell 2000. Others may be less common and may be designed to have

consistent returns or lower variability. No matter what, all FIAs use a crediting strategy to determine what the interest will be at the end of each crediting period.


The point-to-point participation rate strategy measures the performance of the index from one point in time to another, usually starting the day you purchase the contract until a year later and then repeating the measurement every year1. The strategy then uses a “participation rate” that is a percentage of index gains that determines the amount of credited interest, so it increases in proportion to the index.

The participation rate may be below 100% or above 100%, depending on the nature of the index itself. As with all FIAs, the interest in any year cannot go below 0%, no matter how much the index loses.

What do you expect to get out of the FIA? Any FIA guarantees that the account value will not lose money from index losses. The annuity may credit higher interest than a bank CD or a declared rate fixed annuity. Anyone who buys one has to tolerate the possibility that the actual credit may be lower than those alternatives, too.

With a participation rate strategy, the FIA credit each year moves the same way as the index’s positive returns. Of course, years with negative index returns will not reduce those gains no matter how low they go. All of the positive movements in the value are reflected in the FIA annual credit. This allows this crediting method to follow the trend of the index while also protecting against years with losses.

The point-to-point participation rate strategy is one of various crediting strategies available on an FIA. When you consider purchasing an FIA that uses a participation rate, it is important to understand the specific index and how it might behave both on its own and within the structure of the FIA.

1 Some strategies measure over more than one year, but we use one year for our examples because it is the most common.