Sunday, November 7, 2021

Interest crediting methods

Indexed annuity or insurance (IUL) has many variations of crediting methods, it can be difficult to figure out which is best to choose when purchasing an indexed product. There are several crediting rates and crediting methods that work together to generate the interest income yield for any given contract.

However, no matter which crediting method you choose, it protects your account during market downside. If the final result is negative, no indexed interest would be credited and your contract value would remain unchanged (minus fees and cost).

Annual Point-to-Point
This is the simplest of the crediting methods. It may be a good choice if you want to maximize the effects of mid-year market volatility.

  • On your contract anniversary, the beginning index value is compared to the ending index value.
  • The percentage of change in the index is calculated.
  • If the ending index value is higher than the beginning index value, a participation rate, a cap, or a spread is applied to determine the amount of indexed interest you will receive. 

Monthly sum (Monthly point-to-point)
Monthly sum is the most volatility-sensitive crediting method. It can provide interest in steady "up" markets, but it can be adversely affected by large monthly decreases.

  • Calculate twelve monthly percentage changes in selected stock market index.
  • Apply the product’s cap rate to each of the twelve monthly percentage changes.
  • Add the twelve monthly capped percentage changes together to determine the annual interest amount to be credited. If the final sum is positive, you'll receive that amount as indexed interest.

Monthly average
Monthly average can help reduce volatility by averaging monthly highs and lows over the course of the year. It may be a good choice in turbulent markets.

  • The index values at the end of each month are tracked for one year.
  • At the end of the year, those index values are added together and then divided by 12 to determine the monthly average.
  • The starting index value is subtracted from the monthly average, and the result is divided by the starting index value.
  • If the final result is positive, a participation rate, a cap, or a spread is applied to determine the amount of indexed interest you will receive.

Trigger is conservative crediting method, better than fixed rate.

Trigger has a fixed rate and when certain criteria met, it will trigger to use the fixed rate to calculate the interest. For example, if annual point-to-point index value is positive (no matter 0.5% increase or 15% increase), it will trigger to use the fixed rate (say 6%) to calculate annual interest amount to be credited.

Indexed products have certain components (crediting rates) that help determine how much indexed interest you can receive in a given year.

  • Cap: If the return of the index you select exceeds the cap, the cap is used to calculate your interest.
  • Participation Rate:  a participation rate determines what percentage of the index increase will be used to calculate your indexed interest.
  • Spread: The spread or margin rate are synonymous terms that refer to the first portion of gain that would not be credited to your account. The indexed interest rate credited is determined by subtracting a spread from an index's gain during a specified period.