An index annuity earns interest on the basis of an external financial index, such as the S & P 500. Attributed to interest income based on a formula which is linked to the underlying index. An index annuity is usually also guarantees payment of a minimum interest rate that investors do not lose their raw initial investment.
One of the most important characteristics to determine the actual interest received on a contract is the method of accreditation to measure the amount of change in the underlying index. The three most common are annual reset (ratcheting), high-water mark, and point to point:
Annual Reset
 • The interest is determined by comparing the index value at end of year contract with the index value at beginning of year the contract. Interest is added each year for the contract term.
High-Water Mark
 • With this method, the index value recorded at various points in time during the contract period. Normally, the annual event is used as reference points. Interest is added at the end of the contract and is based on the difference between the highest value index and the index value principle.
Point to point
 • The final method pays interest the end of the contract, similar to the method of high water mark. However, the amount is based on the difference between the index value at the end of term and the index value to commencement of the contract.
These three methods can produce similar results over a period of time or the results drastically different in another. It is important that investors in investigating options that are available in the annuity rate annuity policy that interests them, because there are advantages and disadvantages of each method.
The annual reset method has the advantage that the interest is reassessed every year and decreases in the index future may affect the interests obtained in previous years. The disadvantage to the annual adjustment is that the participation rate may change every year. In general, your level will be inferior to other methods of indexing. Sometimes this method is also combined with a limit on the amount of interest you can earn in a given year contract.
The advantage of the method of high water mark is that a client may receive a greater amount of interest than other methods if the index reaches a high point to the beginning or middle of the contract, then falls at the end of the contract. However, the disadvantages are that this method sometimes comes with a lid and a participation rate lower than other methods. In addition, some contracts stipulate that if the pensioner is given the contract before the end of term, then loses interest.
The final method for point to point, has the advantage that many contracts have a higher rate of participation of other methods of annuity because the interest rate can not be calculated before the end of the policy. However, as with the method of high-water mark, some contracts will not pay interest if the board is delivered before the term has ended.
Accreditation methods discussed above three annuities index appear similar interests, however, indexing paid an annuity will depend largely on the method used for the particular policy. Therefore, it is important that investors weigh the pros and cons of each method and choose the option best suited to current market trends.
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