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January’s Best Performing Index Annuities

Index Annuities have their returns tied to the stock market. In most cases, the performance is based on the S&P 500 index. However, index annuities do not perfectly mirror the S&P 500. In fact, all index annuities have a performance floor (minimum annual gain). The floor is usually around 1%. They also have a mechanism which limits upside performance. Below, we compare the 12 month performance of 4 common types of Index annuities, with typical characteristics of each type. First lets start with the performance of the underlying index.

 

How did the S&P 500 do last month?

Up 4.36%

How did the S&P do over the last 12 months?

Up 2.04%Which type of index annuity performed best over the last 12 months? (assuming a Feb 1st anniversary date)

Trigger Point Outperforms Markets & Other Types of Index Annuities

A typical trigger point annuity would have provided a 5.00% gain for the last twelve months outperforming the market by almost 3% points.  When the market gains over 1% in year, a trigger point is the only type of index annuity that has the potential to out perform the market. Unfortunately, trigger point annuities tend under perform other types of annuities when the market has big gains.
Index Annuity Type Performance
Trigger Point 5.00%*
Annual Point To Point 2.04%
80% Participation Rate 1.63%
Monthly Point To Point 1.00%

 

Assumptions:

Trigger Point:Typically, trigger point will provide a return a 4.00 – 6.00%, if the the market finishes with a positive performance for the 12 month period being measured. However, the exact amount is specified in the annuity contract.
Annual Point to Point:An annual point to point typically have an annual performance cap and floor. The floor was assumed to be 1.0% and cap 7.0%. The cap and floor did not impact the calculations.

80% Participation Rate: The performance of the S&P 500 was multiplied by 0.8. However, the actual participation rate will vary from one annuity to another. There was assumed performance cap.

Monthly Point To Point: There was an assumed monthly performance cap of 3% which limited performance in several months. After adding up monthly gains and losses, the annuity finished down 6.11%. However, an assumed performance floor of 1.0% led to final return being positive.

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David Waring

David Waring was the founder of LearnBonds.com and has been a major contributor to the extensive library of investing news and information available on the site. Until the launch of Learnbonds.com in late 2011 there was no single site on the internet catering exclusively to the individual bond investor. This was true even though more individuals own stocks than bonds. Learn Bonds was launched to fill that gap.