Index annuities are a type of fixed annuity that offers investors the potential for indexed growth. When compared to traditional fixed annuities, index annuities provide an opportunity for capital gains when the stock market performs well without any downside risk during poor market conditions. This guide will explore how the point-to-point variety works. If you’re looking for safety and stability in your retirement years, a fixed indexed annuity might be right for you.
Annual Point-to-Point with a Cap
The point-to-point is a simple interest crediting strategy used to measure growth in an index annuity.
Annual point-to-point uses the index value from only two points in time, so it may be a good choice if you want to minimize the effects of mid-year market volatility.
With this method, the insurance company compares the index price at the end of the index term to its price at the beginning of the term for one year.
If the price has increased, the interest credited to the contract will equal the percentage of the index price increase, up to a cap or a participation rate.
If the price has decreased, the interest credited is 0%, and there would be no loss.
This method will typically perform best when the index posts modest and relatively stable gains each year.
How it works:
- On your applicable contract anniversary, the index value from the beginning of the crediting period is compared to the index value from the end of the crediting period.
- The percentage of change in the index is calculated.
- Suppose the ending index value is higher than the beginning index value. In that case, a participation rate, a cap, or a spread is applied to determine the amount of indexed interest you will receive.
- If the value is lower, you won’t receive indexed interest.
- If the final result is negative, no indexed interest would be credited, and your contract value would remain unchanged.
2-year point-to-point
2-year point-to-point uses the index value from two points in time two contract years apart, so it may be a good choice if you want to minimize the effects of volatility between those two points.
How Does Money Grow In An FIA?
Next Steps
Index annuities are becoming a more popular choice for retirement planning. They offer stability and potential growth without any of the downside risks associated with stock market investing. If you’re interested in learning more about index annuities, please contact us for a quote. We would be happy to discuss this investment option with you and answer any questions you may have. Thanks for reading!
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