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What is an Annuity Cap?

Richard Ericson

Who knew that Dr. Seuss gave great investing advice, “The more that you read, the more things you will know. The more that you learn, the more places you’ll go.”

Another common question I am asked regarding indexed annuities is, “What is an Annuity Cap?” First of all, your Annuity Cap is in relation to your contract value. Traditionally with indexed annuities the Index Cap is the maximum annual percentage number over the beginning of year index number that may be credited to you. In other words, how much your contract can earn in the upcoming year. The index Cap is declared on each contract anniversary.

Second, there are typically different Cap choices, or crediting options available on each contract. As to which option is best depends upon your goals and the particular investment environment at the time. A fixed rate is one option. A one year point-to-point is the simplest to understand and is based upon the percentage change in the index number from the previous contract anniversary to the current contract anniversary. The investment indexes that tracked often follow the S&P 500, yet may also include a variety of other indexes or blend of indexes.

Third, you can select or change your strategy each year. Each year at your contract anniversary, you and I sit down together and determine the best Cap option to choose for the upcoming year. The strategy selected may vary based upon your desires as well as the current and projected financial environment. A crediting option can only be adjusted during your anniversary window. In addition, you can mix and match strategies as well as the percentage invested in that strategy. For example, you can select 25% in the fixed strategy, 50% in the annual point to point, and 25% in another strategy.

Fourth, remember that regardless of which strategy is selected, with an equity indexed annuity you will never lose. The downside protection Cap on the floor is zero. If you never lose, you will always be ahead.

And finally, Uncapped strategies. Again Dr. Seuss said it very well, “They say I’m old-fashioned, and live in the past, but sometimes I think progress progresses too fast!” The biggest trend in equity indexed annuities is the uncapped option. On the positive side, this allows you the investor to have your cake and eat it to! The uncapped strategy allows you ALL the opportunity of the particular index chosen. In my opinion, some uncapped contracts are attractive, and some are definitely not. There is opportunity and there is potential. One of the questions you need to ask is, “whose potential is best?” Remember, uncapped does not mean guaranteed. And please remember, “poo poo to potential.”

How can insurance carriers offer that? The insurance carriers are hedging these contracts in a number of ways. One way is by purchasing Options. With an annual point-to-point contract, most carriers are purchasing a one year option. Some contracts operate on a two year point-to-point which enables them to purchase a two year option. The cost savings for the insurance company purchasing a two year option vs. a one year option is significant, and therefore they can pass along the cost savings in the form of client benefits – in this case, they’re offering additional upside potential in an uncapped crediting structure.

“Today is your day! Your mountain is waiting. So… get on your way.” Equity Index Annuities offer flexibility, safety, protection, and opportunity as well as the guarantees that you want and should have in your portfolio. Take action, ask me directly about the Cap option you can and should consider. I will tell you which contract has the highest, best, uncapped, fixed cap on the market today. Ask me your question by calling (303) 749-5853 or email to

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About the Author:

Richard Ericson was born and raised in Salt Lake City, played quarterback for Weber State University and coached football at the Division One level for 10 years at Weber State and Utah State Universities as offensive coordinator. He now coaches individuals on how to invest safely in their retirement plans. He has had his own radio program and was featured in Fox Business News emphasizing risk-free investments. Rich’s expertise is working with business owners utilizing advanced tax strategies to reduce risk and build tax-favored and tax-free wealth. Rich received his Bachelor’s Degree in Communications and his Master’s Degree in Education from Weber State University. He is currently licensed to sell Property & Casualty, Life and Health insurance, as well as annuities. With his expertise in analyzing risk, Rich is well qualified to help individuals evaluate their opportunities to reduce tax, legal, and market risk.

Richard strongly believes that money which grows consistently and without risk is the safest investment for his clients’ retirement income. “Playing the ‘Wall Street Game’ with your sacred money is a sure way to run out of money when you need it the most,” warns Rich. He further states, “If you want to play the stock market game with 30-40% of your wealth, that’s fine, as long as you have enough money in safe, guaranteed investments to meet your retirement goals.”

He can be reached at (303) 749-5853 or


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