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What’s The Best Indexing Strategy To Use In An Indexed Annuity?

John P. Grimes

The short answer is; I don’t know… but I wish I did! Before you give up on me and keep searching, hear me out. If I knew with certainty the answer to that question, I would devote 100% of my energy and money to playing the stock market because I would know the direction and amount of volatility to expect in the future. Of course that’s not possible so we have to make our decision based on what we do know. Let’s take a step back and look at what indexing options are being offered today. A typical Fixed Indexed Annuity today is offering indexing strategies tied to the S&P 500 or the DJIA with crediting periods ranging from monthly to as long as 5 years.

In the interest of keeping this article short, I will focus on the two most common strategies; monthly point to point (monthly P2P) and annual point to point (annual P2P). Both strategies use the basic principal of a starting and ending index value to calculate the return credited to the policy. For example, the annual P2P takes the index value at the beginning of the policy year and compares it to the index value on the next anniversary to calculate the return. The current annual cap rates are in the 4-6% range. The monthly P2P takes the index value at the beginning of the policy year, say the 15th of the month, and compares it to the value on the 15th of the next month. This calculation is repeated monthly until the next policy anniversary when the 12 monthly values are calculated to determine the return. The current monthly cap rates are in the 1.5 – 2.5% range. As you can see, the monthly strategy offers a much greater potential return; 18% to 30% using the current cap rates but there is a catch, there always is. The monthly strategy is capped on the upside but not on the downside.  Simply put, you can’t get more than 2.5% monthly on the upside but you could have significant negative values monthly on the downside which could wipe out any positive monthly gains when calculating the return for the policy year.

So which is the better strategy to use? Historically, if the market is heading up like the year we just completed it makes sense to use the monthly P2P strategy because the corrections were minimal and short-lived. However if the market is very volatile, like we experienced in 2011, the annual P2P strategy could potentially work better because the volatility we saw would  not impact the calculation unless your policy anniversary happened to coincide with one of the market corrections. There are many other factors to consider including your personal risk tolerance, when you plan to access the funds and if you have riders on the policy offering additional benefits. If you would like help in determining which strategy works best for your situation just send me an email or visit my website to get a free copy of the e-book, ‘Savior Retirement’.

To learn more from this annuity professional, click here (John P. Grimes).

About the Author:

John founded Nicholas Financial Group in 1997 as an independent planning firm. We strive to help our clients achieve their financial goals by offering prudent advice and easy to understand solutions to their financial problems. Consider us a guide through the confusing maze of financial products and services.

We specialize in using conservative strategies to grow and protect the assets you’ve worked so hard to accumulate while reducing risk. We’ll also show you how to generate guaranteed lifetime income and efficiently transfer your assets. If you would like to contact John, call him at (508) 881-8500 or send an email to nicholasfinancial@verizon.net.

 

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