Knowledge is essential in determining the right product to choose for a particular strategy. We believe in the power of indexed annuities, but only when they’re part of larger strategy that has the full view of your retirement portfolio in mind.
It’s critical that you understand how certain indexed annuities calculate crediting you as the investor to determine which product is right for you.
With valuable insight, Lou Aarons explains the different ways an indexed annuity credits those invested into it. Understanding this facet will provide you with additional knowledge on which to base your decision making with regards to the products in your arsenal.
Hi, my name is Lou Aarons, I am the partner at Secure Retirement Strategies, and I want to talk to you now about crediting methods. How do you make money in an index annuity? There are three fundamental ways that the insurance company calculates interest earned on the index that you’re participating.
They’re going to use caps, participation rates, and spreads. Caps are very simple. They’re going to say to you, “You’re going to get a hundred percent of what the index does up to a limit.” If the cap is five, you get a hundred percent of that index up to five and no more.
In a participation rate. You’re going to get a percentage of that index. If it’s 50%, you get half the index. If it’s a hundred, you get all of the index, and so on. Current index participation rates can go up to 120, 130% or more. It all depends on the index and the product that you’re using.
Lastly, they will use spreads. A spread means that there’s a certain percentage the insurance company will keep off of the top.
In other words, if you have a spread of 1.5% and the index goes up 7, you’re going to get 5.5. It’s that simple.
A key element to participation rates and spreads is that there is no limit. A cap has a limit.
When you’re looking at an indexed annuity, be sure you understand the index that you’re using and how that interest is indeed crediting.
Join me next time for when I talk about surrender periods and why insurance companies and annuities have surrender periods.