What is Compounding? What is Interest Compounding?
Compounding is a mathematical formula used when interest that accrues on the initial principal and the accumulated interest of a principal deposit, loan or debt. Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.
Fixed Annuities, Fixed Indexed Annuities use compounding mathematics in crediting interest to your account. You make a deposit with an insurance company to start an annuity. That initial principal will start earning interest on the first day. Depending on the product you choose and crediting method selected, the interest is added to the account.
Once the interest is earned or credited, you annuity value cannot go down. The interest is locked in. Now you have your original principal and interest that you are earning interest on again. That is the concept of compounding and that is what makes annuities a great way to invest and possibly see a higher return, than stocks, bonds, or even mutual funds.
We wanted to display the actual math formula for compounding but thought that would be a little extreme. As long as you understand the concept of what tax deferral is and what annuities do when invested for a period of time, then we are comfortable knowing that your principal, interest, and then more interest will be compounded.
For more information about Fixed Annuities, Fixed Indexed Annuities, or Immediate Annuities click here.