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Are Index Annuities a Good Investment? Learn How Interest For Fixed Index Annuities (FIA) is Really Calculated


I’m not afraid to admit that insurance is probably the least exciting subject for anyone to learn about, especially annuities! So if you’re reading this, my guess is that you’re not here to have fun (no judgment if you are).

Instead, you’re conducting the due diligence that every annuity shopper should, so kudos!

Index Annuities win the crown for having the most complicated growth strategy among the different types of annuity products.

Equity index annuity

So I assume you’re here because you’re ready to dive deeper into the potential returns Fixed Index Annuities can provide, which is a significant first step! Because setting appropriate expectations provides confidence that every buyer should experience. 

After all, annuities are a long-term investment. This post will provide an easy-to-understand breakdown of interest calculations for Fixed Index Annuities. You’ll be an annuity expert by the time you’re done.

Contract owners can select multiple crediting methods & indexes to track by specifying the amount they’d like in each strategy they choose. 

How is Interest Calculated For Fixed Index Annuities?

Fixed Index Annuity companies will provide contract owners with several options that they can choose from to customize their growth strategy. There are four variables that come into play when it comes to the potential interest that you could earn from a Fixed Index Annuity:

  1. Crediting Terms: Crediting terms dictate the frequency of interest being credited to the contract.
  2. Index: If you’re unfamiliar with this term, an index is essentially the stock market or a subset of the stock market used to measure the market. Examples of widely known indexes are the S&P 500, Russell 2000, Nasdaq, etc.
  3. Crediting method: I refer to this as the actual growth strategy for Index Annuities because it is how the insurance company calculates the interest earned for that term.
  4. Crediting Limitations: Although an index is used to track the potential interest you could earn, keep in mind this is a fixed product. Therefore, you’re not going to achieve market-like returns. Once the insurance company reviews the performance of the indexes, the next step is to apply limitations and THEN credit the contract interest.

A deeper dive into index annuity interest calculations

Crediting Terms

As a quick recap, a crediting term relates to how often the insurance company will consider crediting interest to your annuity.

Crediting terms can range anywhere from one year to every five years. It’s worth noting that five year terms are rare for Fixed Index Annuities. I’ve only seen a 5-year term twice out of all the contracts I reviewed.

The most common crediting terms are once per year or once every two years.

Next Interest Crediting Dates

Every Fixed Index Annuity contract will reference the date you expect potential interest to be credited. This is known as the “next interest crediting date.”

90% of the time, the month and day are the same as your contract anniversary. However, that is not always the case.

A handful of companies dictate the day of your crediting month. For example, if the annuity company specified the 15th of each month, then your next interest crediting date will look like this:

anniversary month/15/year

Therefore, every Fixed Index Annuity owner should make a note of their specific next interest crediting date.


In the case of Fixed Index Annuities, the insurance company will use the index to track the potential interest credited to the contract.

The index options offered varies between each product but can range from more broad and widely known indexes such as the S&P 500, Russell 2000, Nasdaq, etc., to what’s referred to as “volatility controlled” indexes.

Index Annuities

Volatility Controlled Indexes

Volatility-controlled indexes track a set of assets to minimize fluctuations that would otherwise reflect in broader indexes. In other words, they were fundamentally designed not to have too much movement, up or down. 

Volatility Controlled Indexes for Fixed Index Annuities are often created for that specific annuity product. These are not indexes that are available for the public to invest in and are only offered to annuity owners holding that particular product.

A majority of volatility-controlled indexes were established within the last several years. Be sure to review the “inception” date of each index offered for the product. A lack of history can limit the ability to forecast potential earnings. 

Annuity Rate Crediting Strategies 

Point-to-point crediting method

Better known as “annual point to point,” which is the most popular term for this crediting method.

How does it work?

In terms of the “annual point to point” strategy, the insurance company will look at the value of the index on your last interest crediting date and compare it to the value of the index on your current interest crediting date. 

If there is a positive difference, the insurance company will apply the applicable limitations and credit the contract with the remaining interest. 


  • Crediting terms for this method can be once per year, once every two years, once every three years, or more (terms longer than three years are rare but exist).
  • The insurance company will only consider the index value on those two dates. The performance of the index in between those dates is not considered.

Monthly sum

Unlike the “point to point” crediting method, where only two dates are considered, this method tracks the index’s performance each month. The insurance company will also limit the upside performance with a “cap” or “ceiling” each month, but there is no limit to the downside. 

How does it work?

The annuity company will look back at the index values in the past 12 months. Then sum up the performance in the past 12 months, providing the total interest credited to the contract for that term.


Positive performance is capped. Negative performance is not. Since there is no floor on the negative performance, one natural downturn in the market can wipe out the gains you were on track to earn.

On the bright side, a full year of positive performance can result in decent returns for a fixed product. See the example below:

Annuity rates for fixed annuities
Monthly Sum Crediting Method

As you can see, the opportunity cost is pretty high compared to simply investing in an index fund for the tracked index. 

Monthly average

Out of all of the different crediting methods, this is the most complicated formula; you’ll see why below.

How does it work?

  • The insurance company will start by calculating the average index value over the last 12 months. This is done by summing the index value for the previous 12 months and dividing it by 12, the same way you calculate any average.
  • They will then take the average index value and subtract that from the starting index value. 
  • Then, divide that figure by the starting index value to provide a final percentage of the interest earned.

Performance Trigger

Earlier in my post, I discussed this method and the limitations associated with crediting methods. This method functions very similarly to the “point-to-point” strategy.

The main difference is that crediting limitations do not apply. So instead of using a cap, spread, etc., the annuity company applies a declared rate if there is a positive difference. Here’s a quick recap below.

How does it work?

The annuity company will look at the value of the index at the start of your current crediting term and compare it to the index value at the end of your crediting period. The contract will be credited with the declared interest rate if there is a positive difference. 

Index Annuity Crediting Limits

Cap rate

A cap rate sets the bar on the highest amount of interest the contract can earn or track for that term. The higher the rate, the better.

Remember that if you select an option that quotes a 5% interest rate, that 5% is the MOST you can earn and not the amount of interest you’d automatically receive.

Participation Rate

This is a percentage of the initial calculation you would make, or I’ve also described this as “your share” of the returns. 

Suppose the index provided a gross return of 5% and your participation rate is 70%; that means your contract would receive 3.50% in interest credited to the contract value.

3.50% x 70% = 3.50%


Some index annuity companies will refer to this method as a “margin” rate. I refer to it as the “hurdle” rate because the contract receives any remaining interest above the spread rate. 

If your spread rate is 3% and the gross return is 5%, your annuity would be credited 2%.

5% – 3% = 2%

Declared Rate

A Declared rate is an interest rate set by the insurance company that can work one of two ways:

  • The first option is to allocate all or a portion of your funds into a fixed account with a predetermined interest rate.

If you choose to allocate all your funds to this option, you now essentially have a basic Fixed Annuity.

  • The second is associated with the “performance trigger” method. This means your funds would earn the declared interest rate if there is a positive difference in the index value(s).


When it comes to the potential returns that FIAs offer, it’s most important to remember that at the end of the day, this is categorized as a fixed product, and it’s healthy to do a little digging if any illustrations that imply otherwise. 

Performance varies each term. You may even have a few crediting terms that perform really well, but over a long period, the average annualized return from FIAs tends to fall in line with its peers, providing “fixed-like” returns.

Curious as to which crediting method is the best one? Send me a message or comment below!

Disclaimer: The opinions expressed in this blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security, investment, or insurance product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.