Glossary

Cap rate

The maximum rate an indexed universal life policy or indexed annuity will credit for a period, no matter how much the linked index rises.

Also called: cap, index cap, interest cap

A cap rate is the upper limit on the interest an indexed product credits for a crediting period, usually one year. It applies to indexed universal life (IUL) and fixed indexed annuities, which credit interest based on the movement of a market index such as the S&P 500 without investing in it directly.

Hypothetical example: an IUL segment has a 10% cap, a 100% participation rate and a 0% floor. If the index rises 15% over the year, the policy credits 10%. If it rises 6%, the policy credits 6%. If it falls 20%, the policy credits 0%. Dividends paid by the companies in the index are usually not counted, so the credited return trails the index's total return even below the cap.

Insurers set caps based on the cost of the options they buy to hedge the promise, so caps move with interest rates and market volatility. Most contracts let the insurer change the cap at each renewal, subject only to a guaranteed minimum cap far below the current one. A sales illustration that assumes today's cap for 30 years may overstate future values. Compare caps alongside participation rates and fees; see IUL caps, participation rates and floors.

Last reviewed October 4, 2026

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Related terms

Floor The minimum rate an indexed universal life policy or indexed annuity credits for a period, often 0%, so index losses don't reduce the credited interest. Participation rate The percentage of an index's gain that an indexed annuity or IUL policy credits as interest, such as 80% of a 10% rise, or 8%. Index crediting method The formula an indexed annuity or IUL policy uses to turn an index's movement into interest, such as annual point-to-point or monthly average. Indexed annuity A fixed annuity whose interest is tied to a market index's gains, limited by caps or participation rates, with a floor that shields it from index losses. Crediting rate The interest rate an insurer applies to the cash value of a universal life policy or the balance of a fixed annuity for a given period.

Related guides

Annuity fees, explained The charges inside annuities: M&E, admin, fund and rider fees, surrender charges, commissions, and costs built into fixed rates. Fixed indexed annuities: caps, participation rates and trade-offs A fixed indexed annuity credits interest tied to an index with a zero floor. How caps, participation rates and spreads work, the real costs, and who it suits. How annuity rates are set and why they move Annuity rates come from an insurer's bond earnings minus costs and profit, plus mortality for income annuities. Why they move with bond yields and competition. Indexed universal life (IUL) explained How indexed universal life credits interest from a stock index, what it costs, how policy loans work and why illustrations are limited by regulators. How interest rates affect life insurance prices Insurers invest premiums in bonds, so long-term rates matter most for lifelong and guaranteed policies and least for level term. How each policy type reacts. IUL caps, participation rates and floors How caps, participation rates, spreads and floors turn an index's return into an IUL credit, with worked examples and what insurers can change each year.

Related insurers

Allianz Life The Minneapolis-based U.S. arm of Germany's Allianz SE, a leading fixed index annuity seller that offers indexed universal life through financial professionals. AuguStar Life (formerly Ohio National) Cincinnati insurer formerly Ohio National, renamed AuguStar Life in 2023; owned by Constellation (La Caisse and Ontario Teachers'), focused on indexed life. F&G Annuities & Life A Des Moines annuity and indexed universal life insurer, publicly traded as FG and about 70% owned by Fidelity National Financial, sold through agents. National Life Group A Vermont mutual holding company group founded in 1848, known for indexed universal life with Living Benefits sold through independent agents. Pacific Life Newport Beach life and annuity insurer under a mutual holding company, sold through independent advisors and best known for indexed and variable universal life. Sammons Financial Group (Midland National and North American) Employee-owned group whose Midland National and North American units sell indexed universal life, term and fixed index annuities through independent agents.