When choosing an index annuity, there are many different crediting methods that can affect your return. It is important to understand each of the crediting methods and the way they calculate interest credits to ensure you are receiving the best possible return for your investment.
Annual Point to Point Method - This is the most common crediting method for fixed index annuities. It is based on tracking the index from the beginning of the contract year to the end, and then using that value to determine your interest. The downside of this crediting method is that it can be affected by large swings in the market, and it is susceptible to losses. View here for more information on the reliable fixed index annuities here.
Monthly Average Crediting - This is another crediting method that is used by most annuities. During the crediting period, the insurance company tracks the index and calculates an average of the change each month. If the average is positive, you will receive indexed interest. If the average is negative, you will not receive any indexed interest and your contract value will remain the same.
Participation Rate - In some annuities, a participation rate determines what percentage of the change in the index will be used to calculate your indexed interest. This participation rate can be a cap, a spread or both. Read more on RMD on this website.
Cap - This is the limit on how much indexed interest you will receive during the term of the annuity. It can have a huge impact on the amount of indexed interest you will earn.
Margin/Spread/Administrative Fee - Some annuities subtract a specific percentage of the change in the index before calculating your interest credit. This "margin," "spread" or "administrative fee" is applied to each change in the index and is usually charged as an extra cost for the annuity.
2-year Point-to-Point Method - This method uses the index value from two points during the course of two contract years, instead of one. This method may help reduce volatility between points and can be a good choice for investors who want to limit the impact of swings in the market.
Annual Reset Lock in interest credits each contract anniversary - This is an advantage of fixed index annuities. With this crediting method, any interest credits are locked in and will be credited to your accumulation value each contract anniversary. This method is especially beneficial for a two-year crediting option, as it eliminates the need to reset the credits each year.
Other than this reset feature, you will need to choose the appropriate interest crediting method based on the performance of your chosen index. You should also consider the caps, spreads, participation rates and other features that are part of the crediting formula. These factors can have a big impact on your return, so be sure to talk with your Allianz financial professional about the options available for your indexed annuity. You should also ask about any riders that can be added to your annuity. These can be useful to provide extra benefits, but they can also reduce the amount of indexed interest credited to your contract. For more knowledge about this topic, visit this link: https://en.wikipedia.org/wiki/Fixed_annuity.
Comments