Retirement Annuity Crediting Methods - Monthly Sum

Retirement Annuity Crediting Methods – Monthly Sum

Retirement Annuity Crediting Method - Monthly SumBy Cathy DeWitt Dunn

In our series on retirement annuities, we have previously covered the four types of annuities, fixed index annuity basics, principal protection, and one of the types of annuity crediting methods – the point to point annuity crediting method. In this article, we will discuss another crediting method called monthly point to point, which is also known as monthly sum crediting.

Other than a fixed interest option, there are three types of market index crediting methods used in Fixed Index Annuities. Your contract may have variations of one, or may have all three available for you to choose from. As a reminder, crediting is the mechanism with which your retirement annuity earns money in relation to positive market movement.

In monthly sum crediting, the insurance company captures the value of the index you’ve chosen to track at the beginning, and the end, of each month of your contract. This snapshot of the index is usually taken on the day-of-the-month your contract was issued. The insurance company then determines the percentage gain or loss for each month of your contract. At the end of the contract year, the insurance company adds up those twelve values.

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This strategy has a monthly cap on growth. Let’s say for illustration purposes that the cap is 1.5% per month.  That means you can earn up to 1.5% times 12 months, which totals 18%.

However, we all know that markets don’t go straight up every month, so let’s look at it a little bit differently.  Let’s say that for the first month the market is up 3%.  With the 1.5% cap, we will see 1.5% recorded for that month. The next month the market goes up 1.2 %, so you will see 1.2 % recorded.

The next month, the market has a little bit of a dip and it goes down 3%.  That negative 3% gets recorded as well.

Retirement Annuity Monthly Sum CreditingThese calculations go on for each of the twelve contract months. At the end of the 12 months, the insurance company will add up all the pluses and all the minuses.  If the total is a positive number, that is your return for the year. If the sum is negative, you haven’t earned anything, but you will not lose money in your Fixed Index Annuity.

Now that you understand how monthly sum crediting works, be sure to read our next blog on monthly average crediting for the retirement annuity.

This blog series on retirement annuities is part of our 8-part video series called “Securing Your Retirement Future”. Our videos are designed to help you learn everything you need to know about annuities––from fixed index annuity basics to more advanced topics such as annuity payout rates, the various types of crediting methods, principal protection, and much more.

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Disclosure: Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated. A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed or indexed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments or index.


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