Annuity Crash Course — 4-Module Video Series
The three terms that determine how your money grows inside a fixed indexed annuity — and what to look for when comparing products.
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Prefer to read? Everything Al covers in Module 3 is below.
Welcome Back
Hey there, Al Abarroa here. Welcome back to the Annuity Crash Course. I've talked a lot about the benefits of annuities for investors that want a worry-free retirement. There is no better way to attain peace of mind than by keeping the financial planning process as simple as possible — by taking an income and growth-based approach.
Annuities may not be for everybody, but their unique ability to offer principal protection — so investors never lose money — makes it easier than ever to live the dream of retirement in a way that you never thought possible.
Why Crediting Factors Matter
The problem with buying an annuity is that the way each product is structured can be complex. I believe it's extremely important for investors to educate themselves so they understand exactly what they're buying — which is why today we're going to talk about crediting factors.
This should be of particular interest to you, because crediting factors are one of the main influences on how your money grows. When evaluating a fixed indexed annuity, you must determine whether the engine used to grow your cash will be fruitful enough to provide the growth you seek. To better determine that, we need to understand what drives the growth of that cash value — and that's what we refer to as crediting factors.
Unfortunately, many firms gloss over these terms and don't do a very good job explaining them to investors. I personally believe it's important for people to actually understand what they're buying. You don't need to be an expert — but you should have enough of an understanding so you know what to expect. There are inferior products out there, and bad salespeople, so it's important to be careful.
The key terms to understand are: point-to-point, CAP, SPREAD, and participation rate. Let's move through them in order.
Point-to-Point — The Reference Window
Since the interest credits deposited into an investor's account are pegged to the performance of an index, it's necessary to have a reference window of time in which the index movement will be measured. There will be a starting date and an ending date. In insurance speak, this is known as the point-to-point window — the starting point and the ending point of the window of time used to determine the credit.
The starting point coincides with the start date of your annuity — otherwise known as the contract's anniversary date. The ending point will often be one, two, or three years later, depending on the specific annuity design.
When viewing the point-to-point window: if the market is lower than the starting point, no loss is incurred by you — because principal protection is one of the main features of a fixed indexed annuity. That reference window simply earns a zero, even if the market goes down. No one likes to earn a zero, but if you had to pick between losing money and earning a zero, we all know which is better.
If the market is higher, how much of that gain you are paid is a function of the following three terms.
CAP — The Ceiling
When you hear the word cap, associate it with a salary cap — like that of a sports team. It's a ceiling. The cap refers to the maximum amount of interest credits you can earn in that reference window.
As an example: if there is a 5% cap and the underlying index is up by 10%, your return is limited to 5%.
SPREAD — The Hurdle
When you hear the word spread, associate it with the word hurdle. The spread signifies how much the underlying index needs to move before you participate in its growth.
A 2% spread means that if the market is up 7%, you would participate after the first 2% of appreciation — and your total index credit would be 5%. Hence, the word hurdle.
Participation Rate — Your Share of the Gain
When you hear the word participation, that one's straightforward — it's simply a percentage. A 100% participation rate means that if the index goes up by 1%, you earn an interest credit of 1%. A 50% participation rate means if the index goes up by 1%, you earn half of that.
Setting Realistic Expectations
I believe the best way to make sure that investors are happy with their annuities is to make sure they have realistic expectations. In my opinion, Wall Street has done a poor job of explaining the benefits and downsides of many different investment products. In a world where nobody wants to get burned by something that seems too good to be true, it's extremely important for investors to understand how and why their investments are making money.
The benefit of a structured annuity contract is that an investor can get a clear understanding of exactly what to expect from their portfolio — which is not available when buying stocks and bonds.
Conclusion
If you want reasonable growth potential, the possibility of guaranteed income for life, and an investment that will never lose money in a down market — an annuity may be right for you. Armed with this knowledge, you can have a better understanding of what to expect from your nest egg while it works for you in retirement.
I look forward to speaking with you soon and helping you with your future quality of life and retirement outcomes. Thank you.
No. Our first conversation is a review — we listen to your situation, look at what you have, and tell you honestly what we see. If an annuity makes sense for your income plan, we'll explain why. If it doesn't, we'll tell you that too. We don't earn anything unless a product is placed.
Many of our clients do. We specialize specifically in annuity contracts and retirement income structure — most general advisors don't go this deep on the product mechanics. We regularly work alongside existing advisors as an independent second opinion on the annuity component of a plan.
That's one of the most common reasons people reach out. We review existing contracts regularly — the riders, the guarantees, the fees, and whether the structure actually fits your income plan. You may find it's performing exactly as intended. Or you may find it isn't. Either way, you'll know.
One conversation. No cost. No commitment. We'll review your situation and tell you honestly whether a fixed indexed annuity belongs in your retirement income plan — and if so, how to structure it correctly.
No sales pressure. No commitment. Most reviews completed within 2 business days.
