Best Crediting Method

[Justin Bilyj]

Annual pt to pt, Monthly averaging, 2 Year Term etc.

Which interest crediting method do you find to be the more competitive choice in a volatile market? What about a bull market?
Appreciate any insight

 

[jmhalvo]

Annual pt to pt, Monthly averaging, 2 Year Term etc. Which interest crediting method do you find to be the more competitive choice in a volatile market? What about a bull market? Appreciate any insight

interesting. After 9 years of securities, I am finally adding some FIA biz. So I have no insight, except that it would seem to me to be impossible to guess, in advance, which method will be best. P2P is just too random. But very Interested to hear what the index pros on the forum think.

 

[Norwayguy]

interesting. After 9 years of securities, I am finally adding some FIA biz. So I have no insight, except that it would seem to me to be impossible to guess, in advance, which method will be best. P2P is just too random. But very Interested to hear what the index pros on the forum think.

I think many annuities offer a couple of crediting methods for a reason. So I use them kind of like asset allocation. If your only option is say monthly average or p2p on the S&P 500 explain why you are recommending what you are. But to answer in a volatile market I would prefer an annual reset to make sure I locked in any gains.

 

[jmhalvo]

Annual reset makes sense in a bull market obviously. But a volatile market? I suppose. But of course, volatility could mean that P2P there is nothing- all the "gains" may be in the intervening months. So far, I have done multiple methods and explained that I have no idea which will be better IN ADVANCE.

 

[Justin Bilyj]

JM,
Do you perform Monte Carlo Similations?

 

[scagnt83]

Monthly Sum in a bull market
Annual Point to Point and Monthly Average are best in volatile markets.
Annual Point to Point is most consistent.

That is based on back testing.

 

[Justin Bilyj]

This is a synthesis from a Kaplan Class comparing Crediting Methods and Market Scenarios.

Types of Crediting Methods
Annual reset, point-to-point, and annual high-water mark with look-back

The five common market scenarios

Scenario 1: Average Market
This test shows performance in an “average” market scenario. It provides a reference point for the remaining tests and provides a basic insight into indexing and crediting methodologies. Remember, in real life, there is no “average” market. However, the 10-year period illustrated here comes close to the S&P 500’s actual average historical annualized return of 8.15%.

Scenario 2: Big Bull
The period illustrated here generates an extraordinarily high gain over a prolonged period.

Scenario 3: Bull Spike
This test shows how EIA values change if the index spikes up sharply in a single year. This period shows a low 10-year return with a high single year gain within the first four years. This ensures that the spike occurs within the first term of most EIA products currently available.

Scenarios 4-6

Scenario 4: Bear Trough
This test is the reverse of the Bull Spike. It shows how values change if the Index drops sharply in a single year. This tests shows a high 10-year return with a large single-year loss within the first four years. This ensures that the trough occurs within the first term of most EIA products currently available.

Scenario 5: Volatility
This test shows the impact of a “see-saw” market with many up and down market changes throughout the 10-year holding period. It illustrates a 10-year period with an extremely high standard deviation in returns.

Scenario 6: Liquidity Analysis
This test shows the impact of withdrawals using the Average Market scenario. The illustrated withdrawals are made at the end of the year indicated.

 

[jmhalvo]

JM, Do you perform Monte Carlo Similations?

I do not. I studied them when I got my CFP but rarely bother. Why?