Cap rate, in the context of indexed annuities and indexed universal life, is the maximum interest-crediting rate that can be applied to an account for a given index crediting period. If an index such as the S&P 500 returns more than the cap, the credited rate is limited to the cap; if it returns less, the credited rate may be lower or zero but not negative in principal-protected designs. Cap rates are a key pricing lever for carriers and are influenced by interest rates, option costs, competition, and product features like bonuses or riders. Changes in cap rates over time significantly impact long-term policy performance.

Advisors evaluate cap rates when comparing indexed annuities and IUL products, understanding that a higher cap today does not guarantee stable caps in the future. They examine current and historical cap-rate schedules, carrier communication practices, and the interplay between caps, participation rates, and spreads. When reviewing in-force policies, advisors may recommend reallocating among index strategies if cap changes make certain options less attractive. They also manage client expectations by emphasizing ranges of possible returns rather than assuming constant maximum credits. Understanding cap rates helps advisors assess index strategy quality and explain why carrier rate adjustments can affect illustrated outcomes.