Getting started with indexed interest crediting

This same question is asked by nearly everyone when they get started in this business. "Which indexed crediting method is the best?" Well, that depends. What is your definition of "best?" The simplest to explain? The easiest to calculate? The most widely-used? The best-performing?

If you answered "yes" to any of these, allow me to drop some knowledge on the subject matter. All indexed annuities are priced to return the same amount over a long period of time, regardless of index, crediting method, crediting frequency, or whether the interest is limited via participation rates, caps or spreads. So, allocate your clients' indexed annuity premiums to an S&P 500® annual point-to-point strategy with a participation rate or a Russell 2000 monthly averaging strategy with a spread. In the long haul, they'll both perform about the same.

Some say, "I had a client using XYZ method in 2009, and they earned over 20 percent, but my clients using ABC method were lucky to get zero." To be clear, some methods will perform better than others from one year to the next. Some will earn zero, while others will earn double-digit gains, but they're all likely to perform somewhere between these two extremes. In the long run, the returns will average out to be 1 percent to 2 percent greater interest than average fixed annuity rates on the policy's issue date.

So, allocate 100 percent of the premiums to one strategy, or split it up to maximize the potential for some return, regardless of market performance. As long as you are presenting a crediting method that you understand, feel confident explaining, and have the client's interest in, you are offering the best crediting method available.

"All indexed annuities are priced to return the same amount over a long period of time."

Sheryl Moore is president and CEO of AnnuitySpecs.com and LifeSpecs.com, indexed product resources in Des Moines, Iowa. She may be reached at [email protected].