There are two words we don't see in the same sentence every day: "annuities" and "sexy."
Yet, the latest trend in the index annuity market aims to change that. This is a new type of crediting strategy, commonly referred to as a "rainbow method," and it is turning heads.
Initially only 2 carriers (under the same parent company) offered this innovative interest crediting formula, but other carriers quickly duplicated it in the wake of heavy marketing by independent marketing organizations.
Theoretically, the rainbow method can be used on any of the 21 different crediting strategies found in index annuities today. But to date, it is available only on 2 strategies–the monthly averaging and annual point-to-point strategies.
Here's how it works: The index annuity carrier offers a choice of 2 or more indices on a single crediting method during a term. This is different from traditional index annuities which typically offer only one index per crediting method during a term. (Note: In the rainbow products, the policies currently credit their interest in anywhere from 1-3 years.)
The so-called rainbow products now on the market tend to credit interest by using one of the following 2 approaches.
1. The policy applies a stated percentage weighting to each index; these percentages stay the same over the stated term of the crediting method. Potential indexed gains will be credited based on those weightings at the end of the crediting period, in view of each index's performance.
Example: An insurer offers indices A, B, and C on a monthly averaging crediting method in an index annuity with a 3-year period. Index A will receive a weighting of 40% over the 3-year period; Index B will receive a weighting of 35%; and Index C will receive a weighting of 25%. The carrier then deducts a spread from any potential indexed gains at the end of the term, and then applies the remainder to policy's account value.
2. After the end of the crediting period, the carrier does a look-back on the performance of the indices. Then, it ranks the best performing indices for that term. From that ranking, the carrier applies a stated percentage per index, and then credits any potential index interest accordingly. (These calculations can vary; some will use participation rates, while others may use caps or spreads.)
Example: An insurer offers indices A, B, and C on an annual point-to-point crediting method on an index annuity with a 1-year term. The best performing index over the one-year period gets 75% weighting in the crediting calculation; the next-best performing index gets 25% weighting; and the least-best performing index gets zero credit. The carrier then applies a participation rate to any potential indexed gains to determine the amount to credit to the policy.
