When it comes to capped strategies found in indexed annuities there are quite a few policies for the average American citizen to choose from. Having said that, you will find that the most common strategies opted for are the annual point-to-point system, monthly average strategy and monthly sum version (also known as a monthly point to point).
Below we list these three strategies further and attempt to provide a brief explanation of how they each work:
Fixed Indexed Annuity Annual Point-To-Point
A fixed indexed annuity annual point to point strategy is where the interest is calculated on the difference between the starting and ending value of the annuity (usually the year anniversary of when the annuity is taken out in the first place). If market conditions are favorable then this strategy can prove more profitable than some of the other more popular strategies around.
Fixed Indexed Annuity Monthly Cap
The fixed indexed annuity monthly cap involves the value of the index being taken into account on the day on which it is issued. This is then recalculated on a consecutive month by month basis. The return is based on the average of the monthly index values compared to the original index value of the annuity.
Fixed Indexed Annuity Monthly Sum
A fixed indexed annuity monthly sum is when the interest from each month is tracked (with respect to the cap on the value). The months are then calculated together in order to work out the yearly interest rate which is to be applied to the policy.
What is an Indexed Annuity Cap
An indexed annuity cap is, in effect, a limit on the amount of money it is possible for you to earn within a certain period (in most cases a year).
It’s also possible to buy an uncapped account which could potentially earn you more money but there is no guarantee and at the same time, it could also lose you money. The reassurance about a capped annuity is that you are more or less guaranteed a certain amount of money so it’s not as big a gamble for you as it would be were the annuity to remain uncapped.
What is a Variable Annuity
A variable annuity is when payments change over the course of time. Unlike fixed annuities which are invested mainly in conservative corporate bonds and government securities, variable annuities are more high risk. It’s also possible to fund a variable annuity with a lump sum or to opt to pay in a monthly rate. You don’t pay any tax until you come to withdraw. They are uncapped and the typical owner of a variable annuity tends to have a selection of portfolios which are tied to the performance of the company so that in a good year he or she will be delighted at the amount they have managed to amass financially. Correspondingly though a bad year can result in heavy losses.