Old Index Annuities Can Still Grow

This is just a little something that may help those who have one of the biggest index annuity objections.  Many don’t like the fact that interest rates, meaning cap and participation rates in contracts can change from year to year. Never mind the economics that explain option pricing, popular thought suggests that insurance companies are just out to line the company’s pockets with your money.

I’m going to give you some details from a seven-year contract that I sold eight years ago. That means for the past year, this contract owner was free of surrender penalties but decided to keep the contract because it still had potential and had done reasonably well over the years.

Based on market timing the owner locked in a nice gain. Even though the insurance company could have adjusted rates over time, excellent potential still existed so long as you know how to use the components.

Below you can see the index allocation and associated weight of each in the contract for the past year.  The money was more or less equally weighted to three S&P 500 options that include two based on annual point-to-point and one based on monthly point-to-point. All grew but one was a little better than the others so it carries a greater weight today.

SP500 1YR Monthly Avg Cap$49,455.9632%
SP500 1YR Monthly Sum$56,763.9237%
SP500 1YR Point-to-Point$48,206.0931%

At each anniversary, the owner can change the weight of each allocation to pursue a more conservative or risky strategy. Remember, risk doesn’t mean you can lose money. Rather, it means greater upside potential with the risk of only getting 0%.

Now take a look at the credited rates for each index allocation. Yes, the annual point-to-point options have come down a bit in capped potential but the monthly point-to-point is still high enough to create excellent yield in the right circumstances.

StrategiesProjected Interest Rate for Current Term
1YR Declared Rate1.60%
SP500 1YR Monthly Avg Cap4.10%
SP500 1YR Monthly Sum14.04%
SP500 1 YR Point-to-Point3.85%

After allocation weight and associated index yields are factored, the contract had a blended yield of 7.42%.  Not bad for safe money with protected gains and no fees. Don’t forget that the owner was not bound by penalty from moving the money.  She kept it because she liked it and was rewarded with another nice yield.

It’s neither magic nor scary, but easy to understand if you have an open mind. Rates in an index annuity contract can and will move in either direction depending on interest rates and options pricing. Old index annuities can still grow and this is proof.


Further Readings:

Fixed Indexed Annuity Withdrawals

Indexed Annuity Crediting Methods

Uderstanding Index Annuity Fees

Last Updated on February 19, 2024 by Bryan Anderson