Retirement · Annuities
Annual point to point vs
monthly point to point
Both measure the same index over the same year. Annual point to point compares two dates, the start and the end. Monthly point to point adds up twelve monthly moves. In a steadily rising year they can land close together. In a choppy year they can be far apart, and the difference is not small.
Quick answer
- Annual point to point compares the index on one date to the index on the same date a year later. Two readings, one calculation.
- Monthly point to point measures the index change every month, then adds the twelve results together.
- In most designs the monthly gains are capped but the monthly losses are not, so one bad month can cancel several good ones.
- That makes monthly point to point more sensitive to a choppy market, even when the year finishes up.
- Annual point to point ignores everything between the two dates, which cuts both ways: it misses the dips and the spikes.
- Neither is better in the abstract. They behave differently depending on how the year moves.
- Caps, spreads and participation rates are applied on top of whichever method the contract uses, and they vary by contract and carrier.
How each one is calculated
Annual point to point
The index is read on your contract anniversary and again a year later. The percentage change between those two readings is what the crediting formula works from. Everything that happened in between is ignored.
Monthly point to point
The index is read every month. Each month's percentage change is recorded, usually with a cap on the upside, and at the end of the year the twelve monthly figures are added together.
Why the two can end up far apart
The asymmetry is the thing to understand. In most monthly designs, a gain in any month is limited by a monthly cap, while a loss in any month is counted in full. Add twelve of those together and a single steep month can wipe out several capped gains, even in a year the index finished higher.
Annual point to point does not care about the path. If the index is up over the two readings, that is the number the formula uses, however violent the year was in between. If it is down, the floor protects you the same way it would under either method.
What does not change
Both methods sit inside the same kind of contract, and in a fixed indexed annuity both carry a floor, usually zero percent, so a negative index result does not reduce your principal because of index performance. You are not invested in the index under either method. The index is a measuring stick for the interest credited.
Surrender charges, the term length and the carrier's financial strength are unaffected by which crediting method you pick.
The question to ask about your own contract
Ask which crediting method applies, what the cap is on that method, and whether the cap can change at renewal. Then ask the same about any spread or participation rate. Those four answers describe the behaviour of your contract better than the product name does. The broader picture is on the annuities overview.
Frequently asked questions
What is the difference between annual and monthly point to point?
Annual point to point compares the index on two dates a year apart. Monthly point to point measures the change every month and adds the twelve results together. Same index, same year, different arithmetic.
Which one pays more?
Neither, reliably. Annual point to point tends to hold up better in a choppy year, because monthly designs usually cap monthly gains while counting monthly losses in full. In a steadily rising year the two can be close.
Why are monthly losses not capped?
That is how most monthly point to point designs are written. The cap limits the upside in a strong month, and the full decline is counted in a weak one. It is the single most important thing to understand about the method.
Can I lose money if the index falls?
In a fixed indexed annuity the crediting floor, usually zero percent, means a negative index result does not reduce your principal because of index performance. Fees, riders and withdrawals are separate matters, and surrender charges apply if you exit early.
Can the crediting method change later?
The method itself is set by the contract, but caps, spreads and participation rates often reset at each contract anniversary. Ask what can change at renewal and how much notice you get.
Educational content only. Annuities are long-term contracts with surrender charges. Read the contract before purchasing. Crediting methods, caps, spreads and participation rates vary by contract and by carrier, and any guarantees depend on the claims paying ability of the issuing insurance company.
Have the contract in front of you?
We will read the crediting terms with you and tell you what they actually do, whether you bought it from us or not. Start with the annuities overview, or call +1 (586) 899-1003.
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Your contract and its product disclosure are the authority on the terms described here.
Educational content only.