Annuities
Indexed Interest Potential
Learn More About Annuities
We can explain fixed indexed annuities to you in easy-to-understand terms. If you have any questions about the benefits of annuities and how they could help your retirement strategy, contact the team here at AGM Secure Money.
Let’s Talk About the Benefits of Annuities
You may assume, reading the word “fixed” in “fixed indexed annuities,” that this type of annuity allows for no flexibility. But, in actuality, a fixed indexed annuity (also referred to as an FIA) may provide you with opportunities to make choices for yourself.
Firstly, one of the benefits of annuities such as FIAs is that you can select the index or indexes you want. Although you aren’t buying stocks or funds, you could choose an external index. Interest from your FIA can grow differently based on which index you pick. You could even specify how much of your annuity you want to connect with certain indexes.
Another benefit of these annuities is the buyer’s choice of crediting method. The insurance company abides by a certain set of rules and timeframes if calculating the index interest of your annuity. For example, a buyer can choose between a monthly or annual crediting method. Some methods of crediting use an average value over a certain period of time. Others base their interest on the differences in rates over a period of time. Yet another choice of crediting method marks the changes in the index from the first-anniversary contract date. The interest is then calculated one year later based on that change.
What Factors Influence Potential Interest Rates?
When you purchase an FIA, you have a variety of indexes to designate the annuity’s value to. Additionally, you can determine the crediting method used to track changes in those indexes. It’s important, however, to take a look at some of the factors that affect the way your interest potential is calculated. Consider these factors before choosing your crediting method:
Certain FIAs set a limit on the amount that a contract can earn throughout a certain period. This limit is known as a CAP. The time period is normally a month or year. If your chosen index increases beyond the cap, the cap is used to calculate your interest, rather than index rate.
Some FIAs use participation rates. Participation rates are used to measure your indexed interest rate, after CAPs but before spreads.
Certain FIAs implement a spread to define indexed interest. A spread subtracts a percentage from the accumulation the index reaches within a certain amount of time. For example, if the annuity spread is 5% and the index increases by 10%, the annuity contract gets a credit of 5%.
Choosing Your Crediting Method
Obviously, no single crediting method delivers the most interest under all market conditions. But some of the more popular crediting options are listed below:
This method follows the fluctuations in the market index from year to year and credits the interest based on the annual change.
This method tracks the increases and decreases throughout each month and adds them up. Their total sum determines the index interest credited to your annuity.
This method totals the individual index values of each month and divides them by 12, resulting in an average. The starting index value is then subtracted from this average to determine the result of positive or negative index change. That amount is then divided by the starting value to find the percentage of interest credited to your annuity.
Automatic Annual Reset: The Benefits Explained
An FIA commonly has this feature. The index value of your annuity will automatically reset at the end of each year of your contract. This means that each year’s ending value becomes the next year’s starting value. Additionally, automatic annual reset will lock in any interest your contract earned over the course of the year.
It’s important to note that caps, participation rates, and spreads will also be determining factors in calculating indexed interest, and could potentially reduce the value of interest credited to your annuity.
Learn More About the Indexed Interest Potential of FIAs
If you want a better understanding of the way these crediting methods work, speak to our team here at AGM Secure Money. We’re happy to answer any of your questions and provide you with whatever additional information you may need. Call us today to receive more information on the benefits of annuities, and decide if they’re right for you.
