Point-to-Point Indexing Method

What Is the Point-to-Point Indexing Method?

The point-to-point method credits interest based on the difference between an index’s starting and ending values.

It’s one of the most common ways fixed index annuities calculate growth. It’s simple, transparent, and easy to follow, which is why many annuity buyers are drawn to it. But, like any indexing method, its performance depends on market timing and contract features such as participation rates and caps.

Instead of tracking daily market movement, this method looks at just two values:

• Where the index starts
• Where it ends

The point-to-point method can be structured as annual, biennial, or monthly averaging, which determines how often index performance is measured and interest is credited.

Any gains (subject to caps or participation rates) are credited at the end of the term. If the index finishes lower than where it started, your annuity does not lose value — thanks to built-in downside protection.

How the Point-to-Point Method Works

Instead of tracking daily market movement, it looks at an index’s value at two specific moments to determine how interest is credited.

1. The Index Value Is Set

The annuity company records the index value (such as the S&P 500) at the start of the contract term or crediting period.

2. The Index Is Rechecked at the End

At the end of the term — typically one year — the index value is measured again. Market swings during the year don’t matter.

3. Interest Is Credited

If the index increased, interest is credited based on your contract’s participation rate or cap.
If the index declined, your annuity receives 0% for that period – not a loss.

Example: Point-to-Point Indexing in Action

Imagine an investor who owns a fixed indexed annuity tied to a market index using the point-to-point method. Instead of tracking daily market movement, the provider only looks at the index value on the first day and the last day of the crediting period.

If the index finishes higher, interest is credited. If it finishes lower, the annuity doesn’t lose value.

Index	Start Value	End Value	Index Change	Interest Credited*
S&P 500	3,000	3,600	+20%	20%
Russell 2000	2,000	2,080	+4%	4%
Nasdaq 100	10,000	9,000	-10%	0%

With point-to-point indexing, only the beginning and ending index values matter — not the ups and downs in between.

This structure can work well in rising markets, but it also means gains depend heavily on where the index finishes at the end of the term. The benefit is protection: even when markets decline, the annuity’s value doesn’t go backward.

Who It Works Best For: Point-to-point indexing works best for investors who want a simple way to participate in market growth with downside protection and are comfortable having interest credited at the end of a period.

Variations of the Point-to-Point Method

Point-to-point indexing comes in several variations, each measuring index performance over a different time frame. The structure you choose can influence both growth potential and how frequently interest is credited.

Many people are uncomfortable with the point-to-point indexing method, because performance depends on a single reading of the referenced index. The monthly point-to-point indexing method is a compelling alternative. With this approach, the referenced index is measured each month end, and all of the months’ performance gains (adjusted for any caps or participation rates) are added together to determine the total credit percentage for the year.

Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting Professional

Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

Pros and Cons of the Point-to-Point Method

Point-to-Point vs. Other Crediting Methods

Each indexing method uses a unique approach to calculate interest, which can influence growth potential, timing risk, and how often interest is credited. Here’s how point-to-point compares to some of the most common alternatives.

Crediting Method	How Performance Is Measured	When Interest Is Credited	Timing Risk	Best For
Point-to-Point	Index value at the start and end of the period	End of term	Higher	Simple growth tied to long-term market trends
Annual Reset	Index change each year	Annually	Lower	Locking in gains more frequently
High Water Mark	Highest index value on anniversary dates	End of term	Medium	Capturing strong market highs
Monthly Averaging	Average of monthly index values	Annually	Lower	Smoother returns and reduced volatility
Monthly Sum	Monthly gains added together (often capped)	Annually	Medium	Frequent participation in market movement

Is the Point-to-Point Method Right for You?

Point-to-point indexing works best for investors who value simplicity and protection over short-term market timing.

It’s often a good fit if you:

• Want growth tied to market performance
• Don’t want to risk losing principal
• Prefer a straightforward way to track returns

Because indexing methods, caps, and participation rates vary by product, working with a licensed annuity professional can help you compare options and choose the structure that best fits your goals.