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.