The participation rate ultimately decides how much your equity indexed annuity will gain in a given year. This is a formula that determines how much will be credited to your annuity’s balance. If you have a 75 percent participation rate and the index rises by 5 percent, you will only see a rise of 3.75 percent in your annuity’s balance. This might seem unfair at first, but it is a way to make sure that your annuity is protected during poor market times. Participation rates can change from year to year. But they are designed to deliver consistent performance with your investment—even if your investment loses money. Because participation rates necessarily give you lower returns than the actual market performance dictates, there is money available for your annuity even in years that the market goes down in value.
The biggest thing to think about with participation rates is how they can limit growth. A variable annuity can have potentially unlimited growth. In theory, there is no limit as to how high an asset will go in share price. An equity indexed annuity should be able to enjoy a good deal of growth, minus expenses and reserves for future years. If unlimited growth is your goal, you will want to avoid this type of annuity. Low participation rates might deliver in bad years, but in good years, they can severely limit your earnings. Consider all of your other options before you go with an equity indexed fund with a low participation rate.