A fixed index or equity index annuity will grow based on an external index performance’s positive performance. Thus, an index annuity strategy determines how an owner earns interest. An index annuity rate is the percentage of interest that can be credited to an annuity owner.
Premiums allocated to one of the Index Strategies will receive interest calculated about the upward movement of an external market index, modified by limitations such as a Cap Rate, Annual Spread, or Participation Rate.
The interest credited by the strategies may differ from the indices’ performance.
Interest credits are guaranteed never to be less than zero.
- Cap Rate
- Participation Rate
- Fee Rate
- Spread Rate
- Fixed Interest Rate
- Crediting Methods
- Point to Point Indexing Method
- Monthly Point-to-Point Indexing Method
- Point to Point Inversion Indexing Method
- High-Water Mark
- Low-Water Mark
- Renewal Rates
- Next Steps
- Have a Question About An Index Strategy?
- Frequently Asked Question
- Related Reading
Cap Rate
A cap rate is the maximum rate (ceiling or cap) of interest the annuity will earn during the index term.
For example, if the applicable index increases by 5% and there is a 3% Cap, the interest credited would be 3%.
Participation Rate
When selecting a crediting method, participation rates are the percentage of the upside an indexed annuity owner can participate in.
For example, if the applicable index increases by 5% and there is a 60% Participation rate, the interest credited would be 3%.
Fee Rate
Annuity fees are the charges you incur for a benefit from the insurance or financial company.
Fees are deducted regardless of a positive or negative movement from the index.
Fees can reduce your annuity’s value.
Spread Rate
Annuity spreads or margins are the percentages subtracted from the index change before interest is calculated.
For example, if the applicable index increases by 5% and there is a 2% Annual Spread, the interest credited would be 3%.
Spreads typically only apply to positive movements from the index and do not reduce your annuity’s value during negative movements.
Fixed Interest Rate
A declared fixed rate is credited annually. The interest rate can change every year in an equity-indexed annuity contract.
Crediting Methods
Calculating annuity rates using crediting methods determine how much growth your fixed index annuity can earn. The annual reset method in index annuities offers the ability to “lock in” your gains without going backward in value, even in down and volatile markets. Crediting methods include:
- Point-To-Point
- Averaging
- Water Marks
- Inversion Triggers
Point to Point Indexing Method
The Index Credited Amount under a Point-to-Point Indexing Method is calculated based upon the percentage change of the Index Value from the beginning of an Index Period to the end of the Index Period, the Index Rate.
If the Index Rate is positive, the Net Index Rate will equal the Index Rate, either multiplied by the Participation Rate or limited by the Cap, as may apply.
If the Index Rate is negative or zero, there is no Index Credited Amount.
Monthly Point-to-Point Indexing Method
The Credited Index Amount under the Monthly Point-to-Point Method is calculated based on the sum of the 12 capped monthly index changes during the Index Period.
The monthly index changes are equal to the point-to-point percentage increases or decreases over each month of the Index Period from the starting Index Date to the ending Index Date.
Each index change cannot exceed the monthly Cap.
The Net Index Rate under the contract equals the sum of the 12 capped rates.
The Indexed Credited amount is subject to a minimum of 0%.
The monthly index changes may be positive or negative, but the credited interest will never be less than zero.
If the Index Rate is negative or zero, there is no Index Credited Amount.
Point to Point Inversion Indexing Method
The Index Credited Amount under a Point-to-Point Inversion Indexing Method is calculated based upon the Index Rate.
Unlike the traditional Point-to-Point Indexing Method, under a Point-to-Point Inversion, if the Index Rate is negative, the Net Index Rate will equal the absolute value of the negative Index Rate, limited by the Cap.
There is no Credited Index Amount if the Index Rate is positive or zero.
High-Water Mark
Interest is calculated using the highest value of the index on a contract anniversary during the term; this design may credit higher interest than some other designs if the index reaches a high point early or in the middle of the term and then drops off.
Some trade-offs with this crediting strategy may be the interest is not credited until the end of the term.
In some annuities, you may not get index-linked interest for that term if you surrender your annuity before the end of the term.
You may receive index-linked interest in other annuities based on the highest anniversary value to date and the annuity’s vesting schedule.
Also, contracts with this design may have a lower participation rate than annuities using other designs or a cap to limit the total amount of interest you might earn.
Low-Water Mark
Interest is calculated using the lowest value of the index before the end of the term; this design may credit higher interest than some other designs if the index reaches a low point early or in the middle of the term and then rises at the end of the term.
Some trade-offs with this strategy might be the interest is not credited until the end of the term.
With some annuities, if you surrender your annuity before the end of the term, you may not get index-linked interest for that term.
You may receive index-linked interest in other annuities based on comparing the lowest anniversary value to date with the index value at surrender and the annuity’s vesting schedule.
Also, contracts with this design may have a lower participation rate
Renewal Rates
Renewal Rates are what the fixed interest rate will become after the guaranteed term in a fixed contract.
For indexed contracts, renewal rates will apply to the caps, participation rates, spreads, fees, and the fixed interest amount that renews at every anniversary or reset period.
Every type of deferred insurance contract (fixed and indexed) will have a minimum guaranteed rate, which is the “floor“; the crediting rate will never fall below. This floor is established at the time of purchase and applies to the contract’s life.
Some deferred contracts have a bailout rate as a unique feature. Essentially this allows a contract to become 100% liquid if the renewal rate falls below a set rate. If your rate ever renews at or below the set bailout rate, you can withdraw all your money without a penalty.
Next Steps
Index annuity rates are determined by the percentage of interest that can be credited to an annuity owner. This is based on the external index performance’s positive performance. Because of this, annuity owners are vested in seeing their chosen indexes do well. If you’re interested in learning more about how an index annuity strategy could benefit you, contact us for a quote, and one of our experts will be happy to discuss your options with you.
Have a Question About An Index Strategy?
Frequently Asked Question
Can I change which interest option applies to my money?
You may generally transfer all or a portion of the amounts in the Declared Interest Account or each Participation Account to a different interest option at the end of each Term Period or Index Period, as may apply.
Are dividends included in the index?
Stock dividends may or may not be included in the index’s value depending on the index used. For example, the S&P 500 is a stock price index that only considers stock prices. Therefore, it does not recognize any dividends paid on those stocks.