What is an Index Annuity Strategy?
An index annuity rate is the percentage of interest an annuity owner can earn or not earn in a fixed indexed annuity product. Premiums allocated to one of the Index Strategies will receive interest calucated in reference to the upward movement, if any, of an external market index, modified by limitations such as a Cap Rate, Annual Spread, or a Participation Rate. The interest credited by the strategies may be different than the performance of the indices itself. Interest credits are guaranteed to never be less than zero.
Index Annuity Rates
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 Participation rates are the percentage of the upside an indexed annuity owner can participate in when selecting a crediting method. For example, if the applicable index increases by 5% and there is a 60% Participation rate, the interest credited would be 3%. https://www.youtube.com/watch?v=Pcf1nVAdESI&feature=emb_logo 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 is the percentage that is 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. https://www.youtube.com/watch?time_continue=52&v=79ZaRcGqf2Y&feature=emb_logo
Crediting Methods
Annuity index crediting methods is how growth to your fixed index annuity is determined. The annual reset method in index annuities offers the ability to "lock-in" your gains without going backwards in value even in down and volatile markets. 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 Index Credited 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 is equal to 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. If the Index Rate is positive or zero, there is no Index Credited Amount. 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, then drops off at the end of the term. Some trade-offs with this crediting strategy may be interest is not credited until the end of the term. In some annuities, if you surrender your annuity before the end of the term, you may not get index-linked interest for that term. In other annuities, you may receive index-linked interest, 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 may use 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 prior to 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 tradeoffs 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. In other annuities, you may receive index-linked interest based on a comparison of 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, renewals rates will apply to the caps, participation rates, spreads, fees, and the fixed interest amount that renew at every anniversary date 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 the life of the contract. Some deferred contracts have a bailout rate as a special 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 of your money without a penalty.
Frequently Asked Question
Can I change which interest option applies to my money? In general, you may transfer all or a portion of the amounts in the Declared Interest Account and/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?Depending on the index used, stock dividends may or may not be included in the index’s value. For example, the S&P 500 is a stock price index and only considers the prices of stocks. It does not recognize any dividends paid on those stocks. Read the full article
