Crediting Strategies

One of the best features of an annuity is that it not only protects your money from losses, but it also gives you a safe way to grow your money.

Some annuities will guarantee you a set rate for a certain number of years, others will grow your money based on the performance of an index (like the S&P 500), these annuities can grow your money in a variety of ways, called Index Crediting Strategies. 

There are a variety of index crediting strategies, and we definitely recommend talking with one of our advisors to see which strategy or strategies might be best for you, but the following is a brief overview of some of the more common crediting strategies). It is important to realize that these examples are for the purpose of illustration only, and do not represent currently available rates. In each illustration the amount of interest you get would be the portion in blue.

With Indexed annuities your account grows based on the index and the crediting strategy that you pick, but even if the market goes down, your account value will never go down.  For the purpose of these illustration we look at a year where the index has a 6 % return, but we are happy to answer questions about other possible results.  

Crediting Strategy: The Cap

One of the most common index crediting strategies is the Cap. A cap is a very simple strategy basically if the index your account is tracking goes up so does your account. You get the first dollar, and then you continue to get interest up to the cap. As with any crediting strategy the specific index that you track makes a big difference here. Some indexes tend to consistently outperform other indexes, so the highest cap percentage is not always the best deal. Our advisors look at the historical trends to make sure you get the index that is most likely to give you the highest return.

Crediting Strategy: Participation Rate

With a participation rate, you get a percentage of  any increase that occurs in the index that your annuity tracks. In the illustrated example the participation rate is set at 50%. Depending on the product and the financial environment at the time, participation rates can be as high as 125% or as low as 25%. As with the cap, the participation rate alone is not enough information to determine which product is the best for you. Sometimes a participation rate will also be combined with a cap as well. When this happens it is important to understand which strategy is applied first. Our advisors are trained to help ensure that you get the best bang for your buck whether your product has a participation rate or not.

Crediting Strategy: Spread

A spread is another crediting strategy that is pretty easy to understand. A spread is basically the opposite of a Cap. With a cap you get the first dollar of interest but your interest has an upper limit, with a spread, The Insurance company covers their costs with the first dollar of interest, but when the interest passes the stated target you get everything above and beyond that number. With the right index this strategy can provide you with unlimited potential, however it is important to remember that the first portion of interest goes back to the company, so it takes a higher gain to receive any interest in this strategy. 

Crediting Strategy: Fixed Interest

The fixed interest strategy is one very simple and easy to understand. Your account grows by a predetermined rate each year, regardless of what is happening in the market. Fixed interest accounts can be divided into two categories. 1) guaranteed - which means you lock in your rate upon opening the account. Or 2) non-guaranteed. Which means your interest rate can go up or down each year, but will never drop below a certain level and will always be greater than 0. To learn more about Guaranteed rate products visit our page for MYGAs.

Crediting Strategy: Performance Trigger

A Performance Trigger is Similar to a fixed interest strategy but with a few main differences. With a performance trigger your account will grow in any year where the index value stays ends at the same place it started, or grows (Fixed interest rates are not contingent on market performance). With a performance trigger you get the same declared rate if the index moves up by 1% or if it moves up by 10%. The advantage of a performance trigger is that you can get a higher rate than a fixed interest strategy in years where there is growth.

Other crediting strategies

Every insurance company is always looking for new and better ways to serve their potential clients, so new strategies may be available when you are looking at annuities. Some of these strategies are slightly more complex, but generally they are variations of the above strategies.

A biennial strategy is the same as the core strategy it is based on, but a biennial strategy looks at a two year time span instead of a one year time frame.

A monthly Sum cap is another interesting new strategy where each month has a cap, but there is not a specific cap for the year. This strategy has the potential to pay out more in some years, but it can also pay out less than a traditional yearly strategy. With the monthly sum cap you add the gains (up to a cap each month), and the losses in other months (no caps) to find a total for the year. If the total for the year is positive that is the amount of money your interest is based on. If the total for the year is negative, your account doesn't grow, but it also doesn't fall, it will stay the same until the next year, when the monthly sums will be recalculated.

Of course, if you have questions about any crediting strategy please don't hesitate to ask us!

Popular posts from this blog

Why Annuities