Monthly Averaging vs. Monthly Point-to-Point

Presented by David Corwin Today I’m going to share the difference between two common crediting methods in indexed sales. In order to help you understand monthly averaging, we will compare it to monthly point-to-point, or as some carriers call it, monthly sum.

1. Calculate twelve monthly percentage changes in selected stock market index.
2. Apply the product’s cap rate to each of the twelve monthly percentage changes.
3. Add the twelve monthly capped percentage changes together to determine the annual interest amount to be credited.

As with all indexing methods, if the result is zero or negative, no interest is credited during that contract year. There are four steps used with the monthly average indexing method, as follows, with the first step identical to the monthly point-to-point method:

1. Calculate twelve monthly percentage changes in selected stock market index.
2. Add the twelve monthly percentage changes together.
3. Divide the total by twelve.
4. Apply the product’s cap rate to the result.

Now, from all the material that I’ve seen, it is – drum roll please . . . monthly averaging that wins.  If you had $100,000 under the monthly averaging model in the beginning of 2000 you would have roughly $160,000 fourteen years later.  In that same time frame you’d only have $154,000 under the monthly point-to-point model.