How to Calculate Interest Credit on an Equity Index Annuity

Annuities are retirement investment vehicles managed and maintained by life insurance companies that provide you with an income stream. Equity indexed annuities are a specific type of annuity product that contain features of both fixed and variable products, and link your account value to a stock market index. Calculating the interest credited to your equity indexed annuity is relatively simple, but the complexity of your particular contract ultimately determines the difficulty of the task.


1. Locate your current statement. Many insurance carriers only mail equity indexed annuity statements a few times per year. If you misplaced your last statement, contact the annuity provider and request a duplicate.

2. Notate your previous index level. Your annuity statement will clearly detail your current balance, and the index level currently used as a benchmark for your next crediting date.

3. Perform the calculations. Determine the current day's index value and compare it with your annuity's benchmark level. The difference between the two, when viewed as a percentage, is the theoretical current value of your contract.

4. Deduct the participation level. Equity indexed annuity contracts commonly contain participation level percentages with regard to the performance of your chosen index. The percentage of the actual index value gains that you receive is called the participation level. Participation levels reduce the interest credited to your account. Typical participation rates range from 50%-90%, but many contracts allow owners to fully participate in market gains.

Tip

Many equity indexed annuities only credit interest once per year on the contract anniversary. The result is an unchanged account balance throughout the year, making the performance of the stock market irrelevant except on your contract anniversary.

Warning

Some equity indexed annuity contracts contain a cap on the maximum interest that can be credited to your account each year. Review the details of your contract to determine if the annuity product limits the interest you can earn. Common interest rate caps range from 10%-12%, meaning any increase in your index value above the cap is forfeited.

References

Free Annuity Rates: Equity Indexed Annuities Made Clear
Illinois Dept. of Insurance: Buyers Guide to Equity Indexed Annuities

Resources

Investment News: Insurers Likely to Sweeten Indexed Annuities

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Article originally published on The Motley Fool (09/28/2011), later on The Finance Base