A “participation rate” is a set percentage multiplied by any percentage increase in the outside index. For instance, if a particular index crediting method offers a 50% participation rate, and the calculated return was 10% for the year, the policy would earn a rate of 5% (10% calculated return x 50% participation = 5% return). A "cap" is a set maximum percentage based on the performance of the outside index.
For instance, if a particular index crediting method offers a 6% cap, and the calculated return was 10% for the year, the policy would earn a rate of 6%. A "spread" is a percentage of reduction between the calculated return and the interest rate the consumer will be credit with. For instance, if a particular index crediting method offers a 4% spread, and the calculated return was 10% for the year, the policy would earn a rate of 6% (10% calculated return - 4% spread = 6% return). All participation rates, caps and spreads are set by the insurance company at the beginning of a policy. Unless guaranteed in the policy, the insurance company has the ability to adjust them on an annual basis. Participation rates, caps and spreads are known as "moving parts".
Most annuities being issued today have only one moving part in determining an index calculation (i.e. only a cap or only a participation rate), however, it is possible to have multiple moving parts in determining an index calculation (i.e. a cap combined with a participation rate). An annuity with multiple moving parts is not necessarily better or worse than an annuity with only one moving part, and there is no way of determining in advance of a policy year whether a participation rate, cap and/or spread will yield the best performance.