2/13/2023 0 Comments Index Annuity Crediting MethodsAn indexed annuity is a type of fixed annuity that allows you to participate in the market gains made by a specific stock market index, but also with some additional guarantees and protection against loss. The crediting methods used for determining your indexed interest are different than the methods used in standard fixed annuities, and these differ depending on which index you choose to invest in. Annual Point-to-Point The simplest and most popular crediting method for an indexed annuity is the annual point-to-point. In this crediting method, the index value from the beginning of the contract year is compared to the value at the end of the same contract year. This method may offer the best performance when the index performs consistently throughout the year. Monthly Averaging Similar to the annual point-to-point, this crediting method calculates interest by comparing the index value on each day of the contract year to the daily average at the end of the contract year. This crediting method is the most volatility-sensitive and may be adversely affected by large monthly decreases in the market. Participation Rate This is the percentage of any index gains that the annuity company will credit to your annuity contract. For example, if you have a 70% participation rate, your annuity would credit 75% of the index gains in indexed interest. Window-shop this link for additional facts about the crediting firm. Margin/Spread/Asset or Administrative Fee This fee subtracts a set percentage of any gain in the index (usually called a "spread"). For example, if your annuity has a 3% spread and the index returns 10%, you receive 6% indexed interest (7% - 3%). Cap/Participation Rate In all fixed indexed annuities, some kind of limit on how much of your indexed interest earnings are credited to your contract is put into place. These limits include caps (maximum index returns allowed), participation rates (fraction of index gains credited to your contract) and spreads. Read this helpful article to get more educated about index annuity. A cap is a maximum rate of interest that your annuity can earn during the crediting period, which typically is a year. This limit is guaranteed for the entire crediting term and will never be less than the minimum amount for participation rates and index cap rates or higher than the specified maximum for index margins. If you cancel your contract or make a lump sum withdrawal before the expiration date, you could be charged a surrender charge of up to 7% of your balance. This fee may be reduced as the annuity ages. Riders If your annuity comes with optional riders, you might be required to pay an additional annual fee for each rider. This can add up to a significant amount of money over the life of your annuity. If you don't need the benefits of these riders, they can be a waste of your money. Your financial professional can help you determine which crediting method is best suited to your needs. You'll need to consider several factors, including your long-term goals and the risk tolerance you're willing to take with your investment. You'll also need to understand the limits and fees associated with each method. This link: https://en.wikipedia.org/wiki/Annuity will open up your minds even more on this topic.
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