Point-to-Point Annuities

The point-to-point method is the most straightforward way to calculate performance on an indexed annuity. This contract design may have a higher participation rate and perform better in bull markets, but it comes with the risk of losing gains in the final weeks of the contract.

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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 Annuity.org

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

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  • Edited By
    Lamia Chowdhury
    Headshot of Lamia Chowdhury, editor for Annuity.org

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial editor at Annuity.org. Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

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  • Financially Reviewed By
    Marguerita M. Cheng, CFP®, CRPC®, CSRIC®, RICP®
    headshot of Marguerita M. Cheng, CFP

    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
  • 4 min read time
  • This page features 3 Cited Research Articles

Key Takeaways

  • The point-to-point method measures index performance at the beginning and end of an indexed annuity contract.
  • Contracts with the point-to-point design perform best in average markets or extended bull markets.
  • Point-to-point contracts place more risk on the annuity owner but may have more generous crediting features, like a higher participation rate.

What Is the Point-to-Point Method?

The point-to-point method is one of the most common indexing methods for annuities. When the growth of an annuity is tied to an equity market index, annuity providers can use the point-to-point method to measure the index’s performance.

Point-to-point is the most straightforward method of calculating an indexed annuity’s performance. All an annuity provider has to do is find the difference between the index’s value on the first day of the annuity’s term and the value on the last day of the term. Any fluctuations that occur throughout the annuity’s term are disregarded.

If the index shows an increase in value at the end of the period, a percentage of that growth is credited to the annuity contract after provisions such as a participation rate or rate cap. But if the index’s value is lower at the end of the period, the indexed annuity will not lose any value. 

Instead, the annuity provider will credit a minimum guaranteed return to the contract. The minimum rate of an indexed annuity varies by provider, but a typical guarantee is 3% interest on 90% of the premium value.

A variation of point-to-point is the high-water mark method. Both contracts credit interest at the end of the annuity’s term. However, the high-water mark compares the starting index value with its highest value on an anniversary date of the annuity, rather than just taking the value on the contract’s last day.

There is clarity in how interest is credited with the point-to-point method on an indexed annuity.

Example of the Point-to-Point Method

This chart illustrates how annuity providers use the point-to-point method to calculate interest on indexed annuities. The table shows a few of the most common indexes that annuities may be tied to. Keep in mind that this hypothetical assumes a 100% participation rate and no rate cap on all the annuities.

Index Index Value on Start Date Index Value on End Date Change in Index Interest Credited to Annuity
S&P 500 3,000.00 3,600.00 20% 20%
Russell 2000 2,000.00 2,080.00 4% 4%
Nasdaq 100 10,000.00 9,000.00 -10% 0%

With the point-to-point method, only the beginning and ending index values factor into the calculation. Any ups and downs the index might have experienced over the annuity’s term are disregarded.

Because of this, contracts with a point-to-point design perform best in a bull market, where stock and index values are generally rising. If the index shows a decline in the final months or weeks of the contract, the gains of the previous years can be diminished or wiped out, and the contract may only receive the minimum guaranteed return.

Rising chart icon

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Pros and Cons of the Point-to-Point Method

The point-to-point contract design comes with benefits and drawbacks just like any other type of annuity.

Given the overall complexity of indexed annuity contracts, a significant advantage of the point-to-point design is its straightforwardness. “This is a simple design where you only need to look at two index points to calculate the index return,” Elle Switzer, director of Annuity Product Management at TruStage, told Annuity.org. “Then the cap rate, trigger rate or participation rate determine your return.”

Point-to-point indexed annuities are also the least expensive design for insurers to hedge against. The insurer may pass on this lower hedging cost to the annuity owner through more generous crediting provisions, like a higher participation rate.

However, the less risk an indexed annuity presents to its insurer, the more risk it gives to the annuity owner. In the point-to-point design, the owner bears the risk that a significant drop in the final weeks or months of the contract can wipe out all the previous years’ gains.

The other major disadvantage of a point-to-point contract is its limited liquidity. If you withdraw funds from the annuity before the end of its term, those withdrawals won’t receive any gains because interest is only credited on the last day of the term.

Point-to-point is just one of many methods that insurers use to calculate indexed annuity returns, and each method has its advantages and disadvantages. If you’re thinking about purchasing an annuity, consider working with a financial advisor who can walk you through the options to find the best one for you.

Editor Bianca Dagostino contributed to this article.

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