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Annuities: Getting Started With Indexed Interest Crediting

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At the close of 2011, 14 percent of all annuities sold were indexed annuities. In fact, indexed annuities accounted for one out of every two fixed annuity sales in the last couple of quarters of the year. These retirement income products are one of the fastest-growing segments of the life insurance industry. In short, they’re kind of a big deal.

So, what’s been holding you back from offering these products to your clients? You know the basic pitch: a retirement product where your clients earn interest that is based on the performance of an index (subject to a limit), providing the ability to outpace fixed money instruments, yet offering protection from losses as a result of market volatility. Plus, you are already comfortable with other annuity products that provide a guaranteed lifetime income stream your clients cannot outlive and provide tax deferral to boot. Yet, when it comes to understanding which indexed crediting method is “best,” you feel overwhelmed and unqualified.

What’s the “Best?”

This same question is asked by nearly everyone when they get started in this business. “Which indexed crediting method is the best?” Well, that depends. What is your definition of “best?” The simplest to explain? The easiest to calculate? The most widely-used? The best-performing?

If you answered “yes” to any of these, allow me to drop some knowledge on the subject matter. All indexed annuities are priced to return the same amount over a long period of time, regardless of index, crediting method, crediting frequency, or whether the interest is limited via participation rates, caps or spreads. So, allocate your clients’ indexed annuity premiums to an S&P 500® annual point-to-point strategy with a participation rate or a Russell 2000 monthly averaging strategy with a spread. In the long haul, they’ll both perform about the same.

Some say, “I had a client using XYZ method in 2009, and they earned over 20 percent, but my clients using ABC method were lucky to get zero.” To be clear, some methods will perform better than others from one year to the next. Some will earn zero, while others will earn double-digit gains, but they’re all likely to perform somewhere between these two extremes. In the long run, the returns will average out to be 1 percent to 2 percent greater interest than average fixed annuity rates on the policy’s issue date.

So, allocate 100 percent of the premiums to one strategy, or split it up to maximize the potential for some return, regardless of market performance. As long as you are presenting a crediting method that you understand, feel confident explaining, and have the client’s interest in, you are offering the best crediting method available.


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