Most fixed index annuities calculate index movement for a one year period and then credit interest to the annuity contract by applying a crediting formula to any recognized gain. However, the simplicity of the index annuity structure doesn’t portray the real power of the fixed index annuity story.
At the end of October 2017 there were many fixed index annuities that credited 100% of any gain in the S&P 500 index over the next twelve months up to a maximum cap of 5%. The annuity only looks at two values – how the index had moved from the end of October 2017 to the end of October 2018 – and then credits up to 5% interest based on the change. As the chart shows the S&P 500 moved around quite a bit during that twelve months, but ultimately was up 5.3% when compared to where it was a year earlier. So the fixed index annuity credited 5% interest.
The index was up 5.3%, but the only way to realize that gain would have to been to sell the index and that means cutting yourself off from any future gains. Say that you didn’t sell it? Well, two weeks later your overall gain had dropped to 4.9%, and, as I write this, the index is up 1% from where it as at the end of October 2017.
By contrast, the 5% interest earned in the fixed index annuity is still there. The interest cannot be lost even if the index subsequently goes down. The other point is you didn’t have to sell to recognize the gain; instead the annuity simply set a new value on which to measure next year’s index movement. What if the index
is lower twelve months later? The annuity will simply credit zero interest for the new period and use the lower point as the new starting point for the next one. A fixed index annuity provides a fresh start to take advantage of index declines while protecting what has been earned.
Copyright 2018. Prepared for AMS by Advantage Compendium, Ltd for educational purposes only. Neither AMS nor Advantage Compendium, Ltd. provides investment, tax or legal advice. Information believed accurate, but is not warranted. Any views expressed are not those of AMS. Reproduction is not permitted without written permission. Past performance is not an indication of future results. “Standard & Poor’s” and “S&P 500” are trademarks of The McGraw-Hill Companies, Inc. and must be licensed for use. Standard & Poor’s does not sponsor, promote, or make any representation regarding any index product. Information is from sources believed accurate but is not warranted; we do not provide investment, tax or legal advice. Both investments and fixed annuities involve certain risks; a consumer should consult with their advisor or agent. Fixed annuities are not bank instruments and are not insured by FDIC.