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How does it Work?
Indexing Methods
 
On of the most confusing aspects of index annuities is the method the company uses to calculate the interest rate that the policy will earn. All the methods that are used essentially measure the change in the S and P 500 Index over some period of time. The time periods that companies use are either the policy year, from the day the policy is issued to one year later or a specific term, a period of one or more years.
 
For Example - Specific Term
The S&P 500 was at 500 on the day your contract was issued and over the 5 year term of your contract the highest point the S&P 500 reached was 700. The gain of 200 S&P 500 points represents a 40% increase therefore the value of your contract would be increased by 40%. An annuity policy with an initial premium of $100,000 5 years later would be credited with a $40,000 of interest.

For Example - Policy Year
The S&P 500 was at 500 on the day your contract was issued and during the policy year of your contract the highest point the S&P 500 reached was 550. The gain of 50 S&P 500 points represents a 10% increase therefore the value of your contract would be increased by 10%. An annuity policy with an initial premium of $100,000 one year later would be credited with a $10,000 of interest.

Both of these example use the High-Water Mark in determining how much interest the policy earned.

  • Participation Index Rate
    The amount of the percentage change (which is set by the company) used to determine the amount to be credited to your policy for that year. If the Participation Index Rate was 90% and the percentage change of the S&P 500 Index was 10%. Then the 10% change would be multiplied by the Participation Index Rate of 90% resulting in an Interest Rate of 9.0% being credited to your policy for that term.
  • Percentage Change
    The change in the S&P 500 Index from the beginning of the term to the end of the term expressed as a percentage. The term could be one policy year, 5 policy years or 7 policy years etc. If the S&P 500 was 500 at the beginning of the policy year and closed at 550 at the end of the policy year, there would have been a 10% increase in the S&P 500 Index. In years where the S&P 500 Index is negative the percentage credited to your policy is (0). In this case there would be no change in your policy value.
  • Point to Point
    This refers to the change in the S&P 500 Index from the beginning of the term to the end of the term. The term period may be one policy year or 3, 5 7 policy years.
  • Ratchet Method or Annual Reset
    This method locks in the gain for that period which is usually one policy year. Once the interest is credited to your policy it becomes the value on which the next years gain is calculated.
  • Spread Method
    Companies that use this method calculate the increase in the S&P 500 for that policy year or term then subtract a percentage from that change.
  • For example if the the gain in the S&P 500 for a policy year was 12% and the company used a spread of 2%, then, 10% would be credited to your policy for that year.

  • High Water Mark
    The index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date you bought the annuity. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to your annuity at the end of the term.
  • Low Water Mark
    The index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date you bought the annuity. The interest is based on the difference between the index value at the end of the term and the lowest index value. Interest is added to your annuity at the end of the term.

    "Standard & Poor's", "S&P 500", "Standard & Poor's 500" and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by companies offering Equity Index Annuities. The product is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representations regarding the advisability of purchasing the product.
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