Indexed annuities are insurance policies that act like long-term savings. These policies may extend for up to 15 years or more. However, the interest credited to the policies is different from a regular fixed annuity. Indexed annuities tie the interest crediting to a stock market index.
Annual point-to-point, also called the "annual reset" method, uses the date at which you put money into the annuity as the starting date to track the market index you will be earning your interest from. For example, if your indexed annuity tracks the S&P 500 index, then the day you put money into the contract is the day the annuity starts tracking the S&P 500 for its gains. On the anniversary of your contribution date, if the index is higher than the starting point, then the difference is measured and your annuity is credited with the gains. If the index is the same or lower, then your annuity is not credited with anything, but you do not lose any money.
Monthly point-to-point is a method of crediting interest to the annuity account where the starting point is tracked every month. In other words, instead of measuring the change in the index once a year, as in the annual reset method, the change is measured every month. The interest is added up every month and credited at the end of the year. Losses are once again ignored.
The monthly average method looks back over the previous 12 months on your policy anniversary and takes the average of the changes over the course of those 12 months. Some insurers count negative returns, while others simply average a "zero" for all months where the index lost money. The average is then credited to your account at the end of the year. If the average would cause the account to be negative, the minimum interest rate guarantee specified in the policy would be credited instead.
The best method of crediting in an equity-indexed annuity depends on the market environment. An annual point-to-point method is best when you think the stock market is going to do well in the future and continue to rise significantly. The monthly point-to-point is ideal when you think the market will experience fluctuations throughout the year, but will trend upwards. The monthly average is best when you believe the market will be very volatile. The averaging will smooth out the returns and prevent a decline at or near your anniversary date from significantly affecting your annual return in the policy.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, et al.; 2007
- "Life Insurance"; Kenneth Black, Jr., et al.; 1994
- "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004
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