A lot of advisors think of crediting methods like buckets. Most fixed indexed annuities use a one-year crediting method, so your client gets whatever’s in the bucket at the end of the year. The bucket is dumped out annually (reset) and everything starts over.
If you have a three-year crediting method, the bucket isn’t emptied until the third year. So, if the market has a weak first year (little in the bucket or leaks), but it recovers in the second and third (takes on lots of water), your client could come out ahead. They would have a lot more water in the bucket at the end of the third year than at the end of the first.
However, let’s say the opposite happens – the market has a good first year (lots of water) but stumbles in the second and third (a few leaks in the bucket). Your client could lose out on those returns from the first year and get less than they would have with the one-year option.
Despite the potential for smaller returns, the multi-year crediting option offers several advantages. The pricing on these annuities is usually lower, with higher caps, lower spreads and higher participation rates.
Remember, it’s possible to have a negative return with any crediting method, and we can’t predict market performance. Some clients and advisors simply can’t wait three whole years to see their results – others wouldn’t mind waiting for more.
The Bottom Line: If you have a client who’s a little more patient and wants more upside potential, look at longer crediting options. It may take time, but their bucket could be filled to the brim.
© 2018 Ash Brokerage LLC.