With the array of index annuity products available today, the discussion with your financial advisor will eventually turn towards the method used for crediting contract gains. Inevitably, you will ask the question: Which is the best?

The answer is always the same. It depends. Faced with this question, it's important for you to understand as much as possible about the different types of index crediting methods and the strengths and weakness of each. There are basically three methods, with some variations within each method.

The Point-to-Point method simply compares the level of the stated Index (S&P 500, Nasdaq 100, etc.) at the time of purchase with the level at the end of a certain term, typically 6 or 7 years down the road. If there is an increase, this level becomes the foundation for all the calculations necessary to arrive at your return figure. Interest is added to the contract at the end of the term.

The High Water Mark method looks at several points, usually on the contract anniversary, in comparison to the starting point over the contract's term and takes the highest point to use for the return calculation. This method would work well in an environment where the highest gains occurred early in the life of the annuity, providing a launching point for gains that would then be locked in. Should a down period occur in the market at a later date, the annuitant is protected against loss below the highest point during the annuity's term. Interest is added to the contract at the end of the term.

The Annual Reset method is calculated by adding the gains accumulated each year. With this approach, gains are locked in each year so future decreases in the Index value won't decrease your accumulated capital. This method tends to work better in a choppy market or a steadily rising market. Interest is added each year, whereas with the other methods interest is added at the end of the contract term.

Keep in mind that depending on the crediting option, contracts will have higher or lower participation rates and/or caps on the amount of your credited gain. Typically the Point-to-Point method has the highest participation rate and also the highest caps. The tradeoff is having to rely on the calculation of gains from Point A to Point B over 6 or 7 years. Keep in mind that most index annuities guarantee your premium, so your annuity value would never be less than your paid premiums.

It's important to note that these methods are all using a comparison of fixed points in time. If you introduce the idea of averaging, using more than two points, the result is a tendency to smooth out the ups and downs over time, meaning slightly less performance in a rising market and slightly better performance in a falling market. Averaging could be applied to any of these methods.

Which method works best? That depends on your long-term goals, the time frame in which you are working, and your comfort level with the way your return will be calculated. While it may be tempting to choose an annuity that favors your short-term view of the market, long-term steady growth should be the ultimate goal.

With the proper questions, and the multitude of options available, an annuity product that fits almost any situation is available. We can help you explore the myriad of options available and find the best fit for you.

Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1⁄2, may be subject to a 10% federal income tax penalty.

Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.

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