When you’re shopping for a fixed-indexed annuity, it’s important to understand how averaging works. This can help you make the most of your investment. Averaging is a process that helps protect your account value from market downturns. Here’s how it works and why it can be a valuable feature.
What Is Averaging In Fixed Indexed Annuities
A monthly averaging index strategy averages the closing levels of the applicable equity index on the same day each month during the index term. If the average closing level is greater than the closing level on the first day of the index term, the increase is translated into a percentage that becomes the unadjusted interest rate.
How Does Monthly Averaging Work?
The relevant equity index closing levels on the same day each month during the index term are averaged in a monthly averaging index strategy. The percentage is converted into an unadjusted interest rate if the average closing level exceeds the starting value.
The effects of abrupt changes in the index closing level that happen on a single day are avoided by using a monthly average of the index closing levels to determine the unadjusted index interest rate rather than the index closing level on the last day of the period.
Monthly averaging does not necessarily result in higher unadjusted index interest rates, but it does have benefits. Even though the index closing level fell drastically at the end of the index term in cases when the average monthly growth was high, the unadjusted index interest rate may be substantial under monthly averaging even if the index closing levels had increased during the year.
When the index closing level rises gradually throughout the index term or dramatically after it, monthly averaging can minimize the unadjusted index interest rate when compared with an index strategy that does not utilize an averaging technique.
How Does Daily Averaging Work?
This method for determining interest credit uses a Daily Average calculation to determine a percentage gain or loss in the index value during your reset period.
This is done by comparing the difference between the index value on the first day of the contract year and the Daily Average index value (usually 252 trading days).
The interest credit will never be less than zero.
Averaging is a process that helps protect your account value from market downturns. Here’s how it works and why it can be a valuable feature. Contact us for a quote if you’re interested in learning more about fixed-indexed annuities. We can help you find the right product to fit your needs and budget.
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