Understanding Index-Linked Annuity Interest Crediting
There are a number of different Index linked annuity crediting systems:
a) One-Year Monthly Point-to-Point
In order to determine the monthly point-to-point index change, the previous month’s index value is subtracted from the current month’s index value. This result is then divided bu the previous month’s index value.
Should this result in a positive change, but does not exceed the previously declared cap then it is used as the capped index change for the month in question. If, however, it is higher than the cap, the cap is used as the capped index for the month in question.
A negative index change is not subjected to a cap, but is used as is.
The capped index change is noted over a year. The sum of the twelve index changes will be the index credit rate on that specific index crediting date. The credit rate is multiplied by the option’s account value in order to determine what the index credit is.
b) One-Year Annual Point-to-Point
The calculation of the one-year annual point-to-point index is as follows: Current year’s index, less the previous year’s index value. The result is then divided by the previous year’s index value.
The determining of the capped index value workd in the same way as the one-year monthly point-to-point index.
c) Participation Rate
The participation rate may change a great deal from one annuity to another, sometimes it changes within a particular annuity as well.
A high participation rate may be offset by simple interest, averaging or some kind of point-to-point indexing system.
A low participation rate may be compensated for by offering an annual reset indexing system.
d) Annual Point-to-Point
This index system is based on the change in the index value at the start of the one year term and the end of the term. The interest is added at the end of the one year annual reset term.