## What is a Point to Point Annuity?

Annual point-to-point is a commonly used fixed index annuity crediting method that determines an index’s performance by comparing two points in time; the first day and the last day of the term. Annual point to point was the crediting strategy used in the first-ever index annuity and remains the most commonly used method today.

Two-year point-to-point annuity crediting methods have become more commonplace over the last 12 to 24 months. A two-year point-to-point annuity is essentially the same as an annual point to point except it only measures the index performance every two years rather than every year.

The two-year point-to-point always has better crediting rates than the annual point-to-point annuity because insurers are able to purchase 2-year call options which are less expensive than the one-year call options they purchase when you buy an annual point-to-point annuity.

While no one likes knowing they are guaranteed to earn 0% interest every other year I believe you should at least consider allocating a portion of your annuity to a two-year point to point if that option is available.

I recommend our clients put 50% in the annual point-to-point option and 50% in the two-year point-to-point option. Then, on the first contract anniversary re-allocate the 50% that was in the annual point to point into the two-year point to point annuity crediting strategy.

By implementing this “Ladder Strategy” you are able to receive the higher upside potential offered in a two-year point to point without the downside of earning a guaranteed 9% every other year.

## Annual Point to Point Annuity Calculation

We will use the hypothetical index performance in the chart below to provide an example of how to calculate annual point-to-point annuity performance. There are three commonly used crediting components or “limiting factors” used to determine what portion of the annual point-to-point index performance is actually credited to your annuity account.

1. Annual Point to Point with a Cap
2. Annual Point to Point with a Spread
3. Annual Point to Point with a Participation Rate

Using the 7 % annual index performance determine from the chart above (107,000-100,000 =7000. 100,000 / 7000 = 7%) we will calculate the annuity interest credited assuming a 5% cap, 2% spread and a 75% participation rate.

• 5% Cap = 5% Interest credited (index change up to the cap) 