Cap Rate
Also called cap, index cap, growth cap
The maximum interest rate an indexed policy will credit in a given period, no matter how far the underlying index actually climbs.
A cap rate is the maximum interest an indexed policy or annuity will credit for a given index segment. If the linked index — usually the S&P 500 — rises more than the cap, you receive the cap and the insurer keeps the difference. It’s one of three levers, alongside the participation rate and the floor, that decides what “market-linked growth” actually means inside your policy.
The catch is that on nearly all indexed universal life and fixed indexed annuity contracts, the cap you’re shown is the current cap — declared one segment at a time and fully adjustable by the carrier. The contract only guarantees a minimum cap, which is often as low as 3%. So the 10% cap in your sales illustration is a number the company can walk down to 4% or 5% once your money is inside and the surrender charge makes leaving expensive.
Caps also quietly break the “you get the market’s gains” story in another way: because the cap applies to each segment’s gain but the floor only stops losses at zero, a volatile index that ends flat over several years can credit you far less than the average return suggests. You eat the capped upside in good years without the full rebound after bad ones.
When someone hands you an indexed illustration, don’t ask “what’s the cap?” — ask “what’s the guaranteed minimum cap, and how low can you move the current cap?” The gap between those two numbers is the future the carrier is allowed to give you.
The cap is the single biggest reason an IUL's real return trails the sales pitch — and on most contracts the carrier can lower it after you buy, with no way for you to opt out.
The S&P 500 gains 22% in a year. Your IUL has a 9% cap, so your credited rate is 9% — the other 13 points stay with the insurer. A few years later the carrier drops the cap to 6%, and the illustration you were sold quietly stops matching reality.
A cap that is current, not guaranteed. Ask what the minimum guaranteed cap is — often just 3% — because that floor on the cap is the only number the carrier is contractually bound to honor.