Annuity Crediting Methods

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Maryland Annuity Crediting Methods

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Virginia Annuity Crediting Methods

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D.C. Annuity Crediting Methods

Annuity Crediting Methods

To learn more about Annuity Crediting Methods and what strategy is best for you, click here.

Crediting Methods for Annuities in Maryland, Washington D.C. and Virginia

Maryland Annuity Resource offer Annuities in Maryland, Washington D.C. and Virginia. Annuities have crediting methods for crediting interest to your account. It is important to understand each of the crediting methods and how they are used. You have a wealth of options and a goal in mind that is achievable using the right annuity crediting methods.

Traditional Interest Crediting

Fixed Annuity Crediting, as a contract holder, you earn a rate of interest declared by the issuing company for each year that the contract is open. Fixed Annuity contracts usually have terms from 3-10 years and interest is credited at the contract anniversary.

  •  Premiums are paid into the contract
  •  The company invests the money in bonds, mortgages, or other investment grade securities
  •  The company takes its “spread” from the interest it earns (i.e. the amount of money it needs to pay the expenses of annuity issue and administration and make a profit)
  •  The company credits the declared rate of the interest to the contract

Fixed Indexed Annuity Interest Crediting

In a Fixed Indexed Annuity, the same process is followed but remember that there are two baskets, a fixed account and index account. Most deposits throughout the year will be automatically per company policy placed into the fixed account until annual asset allocation.

  •  Premiums are paid into the contract
  •  The company invests the money in bonds, mortgages or other investment grade fixed income securities
  •  The company takes its “spread” to cover costs and profits
  •  Floor rates and Cap rates ensure you a set boundary of interest that can be earned

What changes between these two annuities, is what the company does with the balance of its portfolio interest earnings after taking its spread. In a Fixed Indexed Annuity, the company takes the balance of its interest earnings — which in a traditional Fixed Annuity would be credited as “declared interest” — and negotiates and invests them in customized index options designed to match the index crediting formula. This should provide a better rate of interest over the course of the Index Term. Earnings from these index options are then used to credit the indexed interest to the annuity. Below is a hypothetical example of how this works.

interest credited

Fixed Index Annuities can be a valuable financial vehicle for retirement savings. They offer the safety and guarantees that clients expect along with growth opportunity to help your retirement savings keep pace with inflation. Fixed Index Annuities provide peace of mind by offering:

  • Tax Deferral
  • Full Accumulation Value at Death
  • Liquidity Options
  • Ability to Avoid Probate
  • Lifetime Income Options
  • Fixed Account Option

 

Daily Average

Daily Average strategy can be beneficial when the markets are volatile, like the past 7 years. It can smooth out market highs and lows because Interest Credits are linked to the average daily performance of selected external market indices. Credits, if any, are measured each contract year and are based in part on the value of the respective index over that same term.

It is important to remember that the credits received WILL NOT mirror the performance of the chosen index option(s). The daily average is calculated by subtracting the Beginning Index Value from the Daily Average Index Value. The Daily Average Index Value equals the sum of the index values over the contract year, excluding the Beginning Index Value, divided by the number of index values available for the contract year. The Beginning Index Value equals the index value on the first day of the contract year.

The difference is then divided by the Beginning Index Value, this amount is called the percent of index change. This value can either be positive or negative. Once the percentage change is determined it will then be subject to either a Participation Rate, Index Cap Rate or a combination of any of the above. The resulting final value will be the amount of interest credited  at your contract anniversary.

Regardless of market performance, Interest Credits can never be less than zero. To illustrate, if the Interest Credit is calculated at 0% or a negative amount then you will receive 0% Interest Credit for that contract year. Interest Credits will only be added using this strategy at your contract anniversary. Once added, credits will be “locked in” and won’t be affected by possible future negative index performance.

Monthly Average

Monthly Average strategy can be a way to smooth out market turbulence as Interest Credits are determined by the average monthly performance of selected external market indices. Interest Credits, if any, are measured each contract year and are based in part on the value of the respective index over that same term.

It is important to remember that the credits received WILL NOT mirror the performance of the chosen index option(s). Monthly average is calculated by subtracting the Beginning Index Value from the Monthly Average Index Value. The Monthly Average Index Value equals the sum of the monthly index values over the contract year, excluding the Beginning Index Monthly Value, divided by 12.

The Beginning Index Value equals the value of the index on the first day of the contract year. The difference is then divided by the Beginning Index Value; this amount is called the percent of index change. This value can either be positive or negative. Once the percentage change is determined it will then be subject to a Participation Rate, Index Cap Rate or a combination of any of the above. The resulting final value will be the amount of interest credited (Interest Credit) at your contract anniversary.

Regardless of market performance, Interest Credits can never be less than zero. To illustrate, if the Interest Credit is calculated at 0% or a negative amount then you will receive 0% Interest Credit for that contract year. Interest Credits will only be added using this strategy at your contract anniversary. Once added, credits will be “locked in” and won’t be affected by possible future negative index performance.

Monthly Point to Point

Monthly Point to Point strategy interest Credits are calculated by determining the change in the index over a one month period, subject to a monthly Index Cap Rate. Credits, if any, will be added each contract year and are based in part on the value of the respective indices over that same term. It is important to remember that the credits received WILL NOT mirror the performance of the chosen index option(s).

Starting in the second month, the previous month’s index value is subtracted from the current month’s index value. This amount is then divided by the previous month’s index value to determine the monthly percentage change. These values can either be positive or negative. This amount is then subject to a monthly Index Cap Rate (or upper limit). Interest Credits for the term are based on the sum of the monthly percentage changes, after the index cap rate is applied, in the index over the term. Negative monthly returns have no downside limit and will reduce interest credited to the contact. However, regardless of market performance, Interest Credits can never be less than zero.

To illustrate, if the Interest Credit is calculated at 0% or a negative amount then you will receive 0% Interest Credit for that contract year. Interest Credits will only be added using this strategy at your contract anniversary. Once added, credits will be “locked in” and won’t be affected by possible future negative index performance.

Annual Point to Point

Annual Point-to-Point strategy can be beneficial when the market is projected to grow over the term because Interest Credits are calculated by using two points in time, the Beginning and Ending Index Values. Credits, if any, are measured each contract year and are based in part on the value of the respective index over that same term. It is important to remember that the credits received WILL NOT mirror the performance of the chosen index option(s).

Annual Point-to-Point is calculated by subtracting the Beginning Index Value from the Ending Index Value. The difference is then divided by the Beginning Index Value; this amount is called the percent of index change. This value can either be positive or negative. Once the percentage change is determined it will then be subject to either a Participation Rate, Index Cap Rate or a combination of any of the above. The resulting final value will be the amount of interest credited (Interest Credit) at your contract anniversary.

Regardless of market performance, Interest Credits can never be less than zero. To illustrate, if the Interest Credit is calculated at 0% or a negative amount then you will receive 0% Interest Credit for that contract year. Interest Credits will only be added using this strategy at your contract anniversary. Once added, credits will be “locked in” and won’t be affected by possible future negative index performance.

Benefits of Annual Reset

Fixed Indexed Annuities may offer an Annual Reset feature or provision that may increase the contract owners value in a number of ways.

  • The provision allows an Index Credit to be added to the Index Account on each anniversary. Once added, this Index Credit is “locked-in”, and can never be taken away due to possible future negative index performance.
  • The Index Credit that was added to the contract owner’s initial premium now becomes the guaranteed Index Account “floor” which participates in all index crediting going forward. This new amount will participate in future Index Growth, giving the client the advantage of compounding.
  • The index starting point is reset each year at the contract owner’s anniversary. This is beneficial when the index experiences a severe downturn during the year. The contract owner can take advantage of gains from that point forward. Without the Annual Reset Provision, the contract owner would have to wait for the index to climb to its original level before any gains could be realized.

Who is the ideal customer for the Annual Reset?

  • The ideal prospect for annual reset is one who normally purchases a traditional fixed rate annuity, but is looking for the possibility of higher returns without additional risk due to market downturns. While an annual reset product is an excellent alternative for a prospect who purchases variable annuities, stocks or mutual funds, it is not intended to replace these retirement vehicles. A prospect should not expect an annual reset product to mirror the performance of any stock market index. Again, it is for the individual who is looking for the potential for higher returns on a guaranteed vehicle.
Inverse Performance Trigger

The Inverse Performance Trigger is based on the S&P 500® Index. The S&P 500 Index Values from the beginning of your contract year are compared to the Index Values at the end of the contract year. If the ending S&P 500 Index value is equal to or less than the starting value, the money allocated to this option will be credited interest at the declared performance rate. If the ending Index Value is greater than the beginning index value, the money allocated to this option will receive a 0% return (see chart below).

The Annual Declared Performance Rate is set annually by the Company in advance of the index period, but will never be less than the guaranteed minimum. As you can see in this illustration, the Declared Rate of 4% is credited when the Index Change is either zero or negative. No matter what the negative change is, the credited rate remains the same.

inverse performance trigger

Hindsight Index Strategy

The Inverse Performance Trigger strategy is based on the S&P 500® Index. The S&P 500 Index Values from the beginning of your contract year are compared to the Index Values at the end of the contract year. If the ending S&P 500 Index value is equal to or less than the starting value, the money allocated to this option will be credited interest at the declared performance rate.

If the ending Index Value is greater than the beginning index value, the money allocated to this option will receive a 0% return . The Annual Declared Performance Rate is set annually by the Company in advance of the index period, but will never be less than the guaranteed minimum.

Biennial Point to Point

The Biennial Point to Point strategy is just like the Annual Point-to-Point, the Biennial Point-to-Point measures the beginning index value and compares it to the ending index value, but after a two-year term instead of a one year term. Index gains are calculated based on the difference between the two values and the growth, if any, is then subject to an Index Cap Rate.

To learn more about Annuity Crediting Methods and what strategy is best for you, click here.