Most index annuities put an upper limit, or cap, on the index-based interest.
This is the maximum amount of interest the annuity will earn per year. One
popular type of fixed index annuity cap is called the monthly point-to-point
or monthly-sum cap.
Here's how it works: If you have a monthly cap of 2.5%, you are credited the
increase in the index for that month a maximum of 2.5%. If the index did 5%
in one month, your monthly interest would equal the cap. At the end of the
year all of the months are tallied and all applicable increases are added to
the value of your annuity. A monthly cap of 2.5% can equal a total maximum
increase per year of 30% (2.5% x 12 months). So with a monthly cap of
2.5% the most you could make in any one year would be 30%, which is the
maximum increase. Most fixed annuities have a monthly cap of 2% or
The cap is the maximum amount you can earn in any one year. With
monthly point to point and annual cap of about 20%. This means if the
market goes up 20% then you can earn 20%, but don't count on it. If the
market goes up 35, 45, or higher, the maximum you can earn is 20%. What
if the market goes down 50% next year, how much will you lose?
NOTHING, that's right!
Learn more about Monthly Caps...