Retirement · Annuities
What does point to point
mean in an annuity?
Point to point is a crediting method. It means the interest you earn is worked out by comparing the index at two points in time, usually your contract anniversary and the same date a year later. Everything that happens between those two points is ignored.
Quick answer
- Point to point is how an indexed annuity measures index movement to decide what interest to credit.
- It compares two readings of the index, a starting point and an ending point, most often a year apart.
- The path between the two readings does not matter. A calm year and a violent year that end at the same level produce the same measurement.
- You are not invested in the index. The index is only the measuring stick for the interest credited.
- A cap, a spread or a participation rate is then applied to that measured change, and those vary by contract and carrier.
- In a fixed indexed annuity there is a floor, usually zero percent, so a negative measurement does not reduce principal because of index performance.
- Monthly point to point is the same idea measured twelve times a year and totalled.
What is actually being measured
Two numbers. The index level on the day your term starts, and the index level on the day it ends. The percentage difference between them is the raw result. Nothing else about the year enters the calculation.
That is worth sitting with, because it is the source of most of the confusion. An index that rose thirty percent mid year and gave it all back finishes flat, and a point to point measurement reads it as flat.
What gets applied on top
Cap
A ceiling on the credited rate for the term. If the measured change is above the cap, you are credited the cap.
Spread
A percentage subtracted from the measured change before interest is credited. Sometimes called a margin or an asset fee.
Participation rate
The share of the measured change that counts. A participation rate below one hundred percent credits part of the move rather than all of it.
Floor
The lower limit, usually zero percent in a fixed indexed annuity, so a negative measurement does not cut into principal because of index performance.
Why dividends are not in it
Most indexed annuities track a price index, which measures the price of the shares in it and not the dividends those shares pay. So the measurement will generally run below the total return of owning the index outright. That is a real difference and it is worth understanding before you compare an annuity to an index fund, because they are not the same instrument doing the same job.
Reading your own contract
Find three things: the crediting method, the term it is measured over, and whatever cap, spread or participation rate is applied. Then ask which of those can change at renewal. If you want us to read it with you we will, whether you bought it from us or not. The overview of the product types is on the annuities page.
Frequently asked questions
What does point to point mean?
It is a crediting method that compares the index at two points in time, usually a year apart, and uses the percentage change between them to work out the interest credited. The path in between is ignored.
Is point to point the same as being invested in the index?
No. The index is a measuring stick for the interest credited. You do not own the index and you do not receive its dividends.
What is the term usually?
One year is the most common, measured from contract anniversary to contract anniversary, though multi year point to point terms exist. The contract states it.
How do caps and spreads affect it?
They are applied to the measured change. A cap limits the credited rate, a spread subtracts a percentage from it, and a participation rate credits only a share of it. They vary by contract and carrier and often reset at renewal.
What happens if the index is down over the term?
In a fixed indexed annuity the floor, usually zero percent, means a negative measurement does not reduce your principal because of index performance. Withdrawals, riders and surrender charges are separate.
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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Sources
Your contract and its product disclosure are the authority on the terms described here.
Educational content only.