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Life Health > Annuities

Get to the Point-to-Point

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What You Need to Know

  • A point-to-point strategy affects the crediting rate.
  • When the index used rises, the client wins.
  • When the index used falls, the client can sleep at night.

These days, many retirees are very concerned about market volatility doing severe damage to their retirement nest-egg. There is no level of protection from market risk losses in a traditional account invested in the securities market.

So what can we do as financial professionals to help our clients eliminate this risk but still have the potential for substantial growth? We can help them “get to the point-to-point.”

There are products, such as fixed indexed annuities (FIA), which offer a point-to-point crediting strategy. Here’s how they work.

If you were to assume one of your clients started with a FIA on the date you’re reading this article, the company would look at your client’s account value at the date of issue of the annuity. This would be the starting point.

With a point-to-point type of product, the annuity company measures account value at the beginning of the selected time period and at the end of the period. At that time, the company would compute any gain earned, if any.

There are only two things that can happen at the end of each reporting period.

One is that the index has increased in value, and your client gets a portion of the gains that the market index they selected (subject to the participation rate or cap rate).

The other thing that can happen is that the index is down and your client is not credited anything.

The condition for accepting a participation rate below the actual return rate is the benefit of not being exposed to any market risk.

That’s it: Never any losses, and only account increases when the index rises.

With a point-to-point product, your clients will either get a portion of the gains at the end of every reporting period, or they will stay exactly where they were previously. These reporting periods happen every year (or two), and you can help your clients change their strategy at the end of each reporting period.

This is why so many retirees or soon-to-be retirees are choosing these point-to-point annuities. They can still have some exposure to account growth but eliminate all the stress of market volatility associated with at-risk accounts.

One last “point” to make here.

The hidden beauty of these products is what can happen after a significant market downturn. For example, let’s say we have another 2008-2009 on our hands, and some indexes lose half of their value. If your clients were in one of those hard-hit indexes, they wouldn’t make any gains that year, but they also wouldn’t be exposed to market-risk losses.

But here’s the beauty of a point-to-point strategy: The reporting period would just re-set in the bad, 2009-like year and would look forward another year. While others were stressed about their market losses, your clients would have had no market-risk exposure in the 2009-like year and could hope to see gains in the following, recovery year.

It’s that simple.

Consider using these point-to-point strategies can help reduce market risk exposure. Both you and your clients will enjoy this level of planning, point to point.


Tim Wood (Photo: Self)Tim Wood is the owner of The Plan Advisor, a retirement planning firm in Johnson City, Tennessee.