Equity Indexed Annuity Indexing Methods: Understanding the Trade-offs

There are many different equity annuity indexing methods that an equity indexed annuity could use to credit your annuity account. Each one of these methods has some advantages and disadvantages associated with it. Here are some of the trade-offs of each method.

Annual Reset Method

One method that your annuity might feature is the annual reset method. This method looks at the total return for the calendar year and then resets. The disadvantage of this method is that the participation rate of the insurance company might change from one year to the next. This means that you will not get the full return of the index.

High Water Mark

The high water mark is another option that is used. The good thing about this method is that it can give you the highest interest that is available in some cases. The drawback of this method is that you may not get the interest credited to your account until the end of the term. If you surrender your annuity, you may not get that interest.

Point-to-Point

This method gauges the change in interest from one point to another. This method can provide you with a higher participation rate than others. The drawback is that you may not get access to the interest until the end of a six- or seven-year term.