Because FIAs don’t directly participate in any stock or equity investment, an FIA’s value will not be affected by negative markets, sometimes called “downside protection.” On the other hand, if the index has a positive return for the year, the FIA policy is credited with interest—sometimes called “upside potential.”
Each FIA policy has a formula for the way interest is calculated and credited that falls into four basic categories:
- Annual reset – Adjusts the policy floor based on the change in the market index over a
specific period of time.
- Point-to-point / term – Similar to the annual reset, but the period is usually five to seven years.
- Annual high-water mark with look back – Typically uses the highest anniversary value to determine the gain.
- Monthly averaging – Measures the index performance once a month on a specified day, and then at
the end of each year, the insurance company adds them up and divides by 12.