All You Need To Know About Hybrid Annuity Crediting Methods

Every hybrid annuity, whose core is an index annuity, comes with one or more crediting methods which are nothing more than a means to calculate the amount of interest to be applied to the account value.

Total interest credit is subject to any one or more of the caps and participation pricing controls previously mentioned, as defined by the contract.  There are several crediting methods available depending on the contract, but I’ll focus on the most common methods.

Annual Point to Point– The beginning and ending index value are used to calculate the total gain or loss.  For example, if the S&P 500 starts the year at 1000 and ends at 1100, the interest credit would be 10%, subject to the participation rate, cap rate or spread.  If the annual return is 0% or less, no interest will be credited.  So, while the option contract that gives you participation in the market expired ‘out of the money’ the underlying principal value, guaranteed by contract, cannot lose value.

Monthly Point to Point Same as above, but the period is a month rather than a year, and also subject to the participation rate, cap rate or spread.

Monthly Average Each monthly anniversary, the level of the index is recorded.  Those levels are added up at year’s end and the total is divided by twelve and compared to the index level at the beginning of the year.  The difference represents the gain or loss for the year, subject to the participation rate, cap rate or spread.  If the annual return is 0% or less, no interest will be credited.  Again, while the option contract that gives you participation in the market expired ‘out of the money’ the underlying principal value, guaranteed by contract, cannot lose value.

Monthly Sum The gain or loss in the index every month is recorded.  Each value is totaled to calculate the annual gain or loss, subject to the participation rate, cap rate or spread.  If the annual return is 0% or less, no interest will be credited.  Again, while the option contract that gives you participation in the market expired ‘out of the money’ the underlying principal value, guaranteed by contract, cannot lose value.

What Is The Best Hybrid Annuity Crediting Method?

Extensive studies attempt to determine which crediting method is most profitable.  No single method has shown total superiority as each works well in different market conditions.

Most Index Annuity contracts offer multiple crediting methods and ways to change allocation for portions of the account between different methods.

Choice of crediting method will depend on your view of where the market is going.  But since no one really knows for sure, the prudent strategy is to divide your premium investment between the various crediting methods available in your contract.

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