Indexed annuities credit interest based on market-level changes in a chosen index. This allows clients to receive interest based on the performance of specific indices without having their annuity lost during market declines. In addition, many indexed annuities use monthly averages of the index to smooth out gains and protect against big swings in the value of the index.
Each of North American’s index annuities have a number of available crediting methods and indexes that perform differently in various market scenarios. The best index annuity crediting method is the one that best meets your needs and fits with your overall financial plan.
Annual Point to Point (PPP)
The simplest of all indexed annuity crediting methods, annual point-to-point uses the index value from only two points in time, so it may be a good choice for clients who want to minimize the impact of mid-year market volatility. This crediting method also requires the most effort on the part of the client. Click here: https://safewealthplan.com/annuity-crediting-methods/ for more info on the best indexed annuities credit methods.
Annual point-to-point crediting is the most common type of indexed annuity crediting method and is typically a good choice for clients who expect market returns to be stable and relatively small.
This crediting method involves the insurance company tracking the index from month to month, applying a cap for gains. The sum of the gains from each month is then added up and the resulting percentage is used to determine the credited interest amount.
Monthly Sum crediting
The monthly sum crediting method is the most volatility-sensitive indexed annuity crediting method and can provide the greatest interest when the market is steady, but it can also be adversely affected by large monthly decreases in the index value. This crediting method is not a good choice for clients who expect the value of the annuity to fluctuate widely from month to month, or those who wish to take withdrawals during the time period in which the annuity is indexed. Read this helpful article for more on the reliable index annuity crediting method now.
Another volatility-sensitive indexed annuity crediting option is the 2-year point-to-point crediting method. This crediting method takes the index value from two points in two contract years and then uses that same value to calculate a percentage of change during the second crediting year.
Unlike the monthly sum, this crediting method does not allow the credited interest amount to be negative or zero. The credited interest will never be less than 0% or more than 100%.
In addition to limiting the upside potential of index increases, most contact contracts also include caps, spreads and participation rates that limit how much indexed interest you can receive. These limits occur in the form of pricing levers that the insurance company can choose to set.
These pricing levers include caps, participation rates and spreads that are applied to the amount of indexed interest credited to your annuity. These pricing levers have a direct impact on the amount of indexed interest you will receive and the crediting method you should choose. For more information about this topic, click here: https://en.wikipedia.org/wiki/Equity-indexed_annuity.