The High-Water Mark Method and Annuities

With the high-water mark method, interest credited to an indexed annuity is based on the highest anniversary value of the underlying index. This contract design locks in the highest gains in an index while protecting against index declines.

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  • Written By
    Jennifer Schell, CAS®

    Jennifer Schell, CAS®

    Financial Writer, Certified Annuity Specialist®

    Jennifer Schell is a professional writer focused on demystifying annuities and other financial topics including banking, financial advising and insurance. She is proud to be a member of the National Association for Fixed Annuities (NAFA) as well as the National Association of Insurance and Financial Advisors (NAIFA).

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    Stephen Kates, CFP®

    Stephen Kates, CFP®

    Principal Financial Analyst for

    Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

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    Savannah Pittle
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    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is an accomplished writer, editor and content marketer. She joined as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

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    Marguerita M. Cheng, CFP®, CRPC®, CSRIC®, RICP®
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    Marguerita M. Cheng, CFP®, CRPC®, CSRIC®, RICP®

    CEO of Blue Ocean Global Wealth

    Marguerita M. Cheng, CFP®, CRPC®, CSRIC®, RICP®, is the chief executive officer at Blue Ocean Global Wealth. As a CFP Board of Standards Ambassador, Marguerita educates the public, policymakers and media about the benefits of competent and ethical financial planning. She is a past spokesperson for the AARP Financial Freedom campaign.

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  • Updated: May 1, 2024
  • 5 min read time
  • This page features 3 Cited Research Articles

Key Takeaways

  • Insurers can use the high-water mark method to measure the performance of an annuity’s underlying index.
  • The high-water mark method involves comparing the index’s starting value to its highest value on an anniversary date of the contract’s term.
  • This indexing method performs well in volatile or bull markets, but in less favorable conditions the returns may be less competitive.

What is the High-Water Mark Method?

The high-water mark method, also known as the look-back method, is one indexing method that insurers can use to calculate the interest on an indexed annuity. An indexed annuity accumulates growth based on the performance of an underlying index like the S&P 500, and annuity providers measure index performance in a few different ways.

Insurers calculate interest using the high-water mark method at the end of an indexed annuity’s term. The annuity provider will look back at the underlying index’s value on the contract’s anniversary date each year of its term. The provider then takes the highest of these anniversary values and subtracts from it the index value on the first day of the annuity contract.

If the total change in the index is positive, then a percentage of that growth is credited as interest to the contract. But if none of the anniversary values were higher than the starting value, the insurer will typically credit the contract with the guaranteed minimum return.


When investing in an indexed annuity, keep in mind that the guaranteed minimum return is usually 90% of the premium amount at a 3% annual interest rate. It’s worth noting that it would take approximately 4 years for the contract value to exceed the original principal amount (100%) at this interest rate, and significantly longer when adjusted for inflation.

The high-water mark design may be thought of as a variation of another indexing method, the point-to-point design, where the annuity provider simply subtracts the starting value of the index from the value on the last day of the contract term. These two contract designs are similar in that both credit interest at the end of the contract term. 

However, the high-water mark method tends to show better returns than point-to-point because it can pull from the highest value on an anniversary date rather than wherever the index falls at the end of the term.

Read More: Indexing Methods for Indexed Annuities

Rising market conditions can benefit annuities that use the high-water mark method to calculate interest credited; whereas stable market conditions may result in lower returns or interest credited.

Example of a High-Water Mark Indexed Annuity

The following table shows how an insurance provider might use the high-water mark method to measure the growth of an annuity’s underlying index. 

Indexed Annuity With High-Water Mark Design

Date Event Index Value on Anniversary Date Highest Anniversary Date Value
Oct. 1, 2018 Contract Issued 100.00
Oct. 1, 2019 1st Anniversary  97.92
Oct. 1, 2020 2nd Anniversary 112.24
Oct. 1, 2021 3rd Anniversary 125.50 ☑️
Oct. 1, 2022 4th Anniversary 118.76
Oct. 1, 2023 5th Anniversary 92.35

In the example above, the highest anniversary value occurred on the contract’s third anniversary date. Although the index has actually declined since the contract’s issue date, the provider will still credit the annuity 25.50% interest, assuming a 100% participation rate

did you know?

High-water mark indexed annuities usually do not have rate caps.

Because it capitalizes on the highest performing point of the term, the high-water mark design performs best in a volatile market with lots of ups and downs. A bull market, or a market in which equity prices are generally on the rise, can also greatly benefit annuities using the high-water mark method.

Retirees who want to take advantage of a bull market while protecting their savings from market volatility might consider an indexed annuity with the high-water mark design. The potential returns from the high-water mark method may help offset the effects of inflation, allowing investors to maintain their retirement lifestyle.

Will You Be Able To Maintain Your Retirement Lifestyle?

Learn how annuities can:

  • Help protect your savings from market volatility
  • Guarantee income for life
  • Safeguard your family
  • Help you plan for long-term care

Speak with a licensed agent about top providers and how much you need to invest.

Pros and Cons of the High-Water Mark Method

The high-water mark method can benefit indexed annuity investors in a rising market, but different conditions could make this contract design much less advantageous. 

Pros and Cons of the High-Water Mark Method


  • Can protect from index drops at the end of a contract term
  • Potentially more liquid than other contract designs


  • Complicated crediting method
  • Returns may be low in poor market years

The main advantage of the high-water mark design is protection against index declines. With the point-to-point method, for example, a drop in the index during the final weeks or months of the contract could mean little to no interest credited to the contract. High-water mark contracts avoid this by always taking the highest anniversary value.

For this reason, investors with concerns about the liquidity of their indexed annuity might prefer the high-water mark design over point-to-point. Some high-water mark contracts have a vesting schedule that allows part or all of the anniversary gains to be excluded.

Matt Lewis, Certified Long-Term Care specialist and vice president of insurance at Carson Group, told, “In a high-water mark crediting strategy, the pros are really twofold. It can provide some downside protection, as the interest that is credited cannot go below the index value that was previously established. It also provides upside as interest credited can also be higher than the high-water mark.” 

That said, there are still some downsides to the high-water mark method. Lewis said that the biggest disadvantages of this contract design include a “more complex” crediting strategy and “lower potential returns in a stable market.”

Essentially, indexed annuities provide a guaranteed minimum rate, ensuring that even if the underlying index performs poorly throughout the contract term, the annuity owner will still receive a certain amount of credited interest.

As with any annuity product, it’s important to weigh the pros and cons before deciding to move forward. Consulting with a financial advisor can help you understand all the ins and outs of a high-water mark indexed annuity and decide if it’s right for you.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: May 1, 2024