Point-to-point is the simplest and most commonly used crediting method in fixed indexed annuities. It simply measures the index value at two points in time—the start and end of the crediting period—and calculates your interest based on any positive change.
How annual point-to-point works:
1. On your contract anniversary, note the starting index value
2. One year later, note the ending index value
3. Calculate the percentage change
4. Apply participation rate, cap, or spread
5. Credit the resulting interest to your account
Example calculation:
- Starting S&P 500 value: 4,000
- Ending S&P 500 value: 4,400
- Index gain: 10%
- With 80% participation rate: 8% credited
- With 6% cap: 6% credited
- With 2% spread: 8% credited
Advantages of point-to-point:
- Easy to understand and verify
- Not affected by mid-year volatility
- Often has the best cap rates and participation rates
- Clear, predictable crediting calculation
Considerations:
- A bad single day (the end date) can reduce a year's gains
- Doesn't capture intra-year gains if market retreats by year-end
- One measurement point means more "luck" involved
For most Ocala investors, annual point-to-point provides a good balance of simplicity, potential returns, and favorable crediting terms.
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