Another advantage of a fixed index annuity is the opportunity to accumulate interest based on changes in an external index. Some FIAs offer you a choice of indexes rather than just one. In addition to choosing your indexes, you can also determine what portion of your annuity’s value will be based on each index selected.
Although an external market index or indexes may affect your contract values, the contract does not directly participate in any stock or equity investments. You are not buying shares of any stock or index fund.
FIAs’ Indexed Interest Potential
When you purchase a fixed index annuity, you can allocate its value to one or more selected indexes. We then use a crediting method (which we will define later) to track the performance of your index(es). At the end of each contract year, we calculate the indexed interest.
Because of their potential indexed interest, FIAs give you a unique opportunity for accumulation.
If the result is positive, you will automatically receive indexed interest, subject to a cap or spread (which we will also define later). That interest is locked in each year and cannot be lost due to index declines at some point in the future.
If the result is negative, nothing happens – and that can be good news! Although you won’t receive any indexed interest for the year, your annuity’s value doesn’t decline.
There are two reasons why. First, you are not actually participating in the market or investing in any stock or bond. Second, most FIAs have a feature called annual reset, which we will discuss later.
FIA Crediting Method Choices
No single crediting method consistently delivers the most interest under all market conditions. For a better understanding of how each crediting method works, talk to your financial professional. Keep in mind that caps, participation rates, and spreads will also enter into the calculation of indexed interest, and may reduce the amount of interest credited. Annual point-to-point. This method tracks changes in the market index from one contract anniversary to the next and credits interest based on that annual change. Monthly sum. With this method, individual monthly increases and decreases in the index values are tracked and added up. Their sum helps determine the indexed interest credited to the annuity. Monthly average. For this method, the individual monthly index values are totaled, and then divided by 12 to find the average. The starting index value is subtracted from the average to determine the amount of positive or negative index change. This amount is divided by the starting value to determine the percentage of interest credited to the annuity.
The Benefits of Automatic Annual Reset
Annual reset is a common FIA feature. At the end of each contract year, your annuity’s index values are automatically reset. This means this year’s ending value becomes next year’s starting value. Annual reset also locks in any interest your contract earned during the year. So a negative index return one year will not affect the following year’s potential for indexed interest.