Indexed annuities offer a way to earn interest on your cash value without investing directly in the stock market. Generally, you can choose an index to track – or multiple indexes to track – and an insurance company determines your indexed interest based on the performance of that specific index. There are a number of crediting methods available, and each performs differently in different market scenarios. Learn here about the best index annuity crediting methods now.
Annual Point-to-Point Method - This is the simplest and most common crediting method, which measures the percentage change between point A and point B of your contract. The point-to-point value is then compared to the beginning value of your contract. Monthly Averaging - This method is similar to the annual point-to-point crediting method, except that the point B of your annuity is not point A but rather the average of the index values each month over 12 months.
Monthly Sum Method - This method tracks the index values each month and then adds up the monthly gains for that particular term. If the sum is positive, interest is credited to you. If the sum is negative, you do not receive any interest.
Enhanced Participation Rates and Strategy Charges
Some fixed index annuities include enhanced participation rates and strategy charges, which apply to certain crediting methods. These enhancers may limit the amount of interest that can be credited to your account and may not be appropriate for all clients. Read more about GMIB on this page.
Margin/Spread/Asset or Administrative Fee
Some indexed annuities subtract a percentage from any gain the index achieves before crediting interest. This “margin,” “spread,” or “asset” fee may be charged instead of, or in addition to, a participation rate. It is important to understand how this works so you can make an informed decision when selecting your index annuity.
Caps and Spreads
Most fixed index annuities have limits on how much interest can be credited to your account. These limits can be very broad and are designed to protect your account from large losses in the event of a market decline.
The limiting factor is called the “cap.” This limit can be 4%, 10% or even 25%.
A cap is an arbitrary value that is placed on the underlying index to prevent large market movements from wiping out a substantial portion of your annuity’s value. In general, this cap can help smooth out gains, but it can also wipe out a loss.
Some indices also have “spreads,” which are fees that the insurance company deducts from any index gain before crediting interest. For example, if an annuity has a 3% spread and the index returns 10%, you would only receive 6% in indexed interest (7% x 3%).
Many indexed annuities allow you to place a portion of your premium in additional options, such as riders and strategies that increase the interest credits credited to your account. These extras can help you achieve your financial goals and are not required by law to be included with a fixed index annuity. For more information about this topic, click here: https://en.wikipedia.org/wiki/Annuity.
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