Indexed Annuity Crediting Methods
Crediting methods inside a fixed indexed annuity contract show the different ways interest is credited to the account value.
Crediting methods inside a fixed indexed annuity contract show the different ways interest is credited to the account value. All you need is an index and a measuring period with a few variations of each that will make an annuity with a long list of options.
We covered how each contract has a fixed rate available as the most basic option for allocating funds. Fixed interest is calculated daily so if you are allocated to it with a portion of the money you’ll see daily growth in the account value. It’s just like a money market fund as part of an investment portfolio. Index options are available as an alternative that offers more growth potential.
To recap, each index option is measured by either a cap rate, participation rate, or margin which means a certain portion of the index gain is credited to the account. A good term for that is ‘pricing lever’ and the rate of growth will be determined annually by the cost of an option on the index.
Crediting periods are also important, defining the period of time that needs to pass before an index return can be calculated. Most often this is one or two years but you’ll also see options for 18 months and there are a few products that offer crediting periods of five or ten years. You have to wait until the end of the crediting period to see if you make any money so the longer options mean you’ll be waiting quite a while.
Regardless of the period covered, there are several ways the index return can be calculated. The most common ones are detailed below.
Learn how indexed annuities make money.
Ways index returns are calculated
- Annual Point-to-Point
- Two-Year Point-to-Point
- Monthly point-to-point
- Monthly Averaging
Other options include different time periods as short as 18 months and as long as five to ten years.