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How Are FIA Interest Rates Calculated?

Do annuities come with fees? This is a question that comes up often. Short answer: Some do, yes. However, others only come with fees when you select certain additional benefits, or if you violate certain terms of the contract. Importantly, whether you pay fees or Fixed indexed annuities (FIAs) provide an interest rate to annuitants. However, unlike fixed annuities, FIAs do not pay interest based on a set interest rate in the annuity contract. The interest rate calculation is, instead, much more complicated. There are two main factors that determine how an FIA’s interest rate is calculated: The indexing method, and the participation rate. Let’s take a closer look at what those terms mean.

Indexing Method

When an FIA provides an interest rate, the issuer uses an indexing method in order to calculate it. This index may be based off of the stock market, but an FIA isn’t dependent on the market. No matter what the market does, your principal amount will stay protected. This is one of the main benefits of using an FIA. There are three types of indexing methods used in FIA calculations.


First, insurance companies define a time period for the point-to-point guideline. For example, one every month, or every year. Then, they look at the starting value of your index. The difference between the starting value and the point-to-point value is noted. If the change goes up beyond a certain percentage, your interest rate may increase for that amount of time. If it goes down, you’ll still maintain your principal balance. You may also still receive a certain minimum interest rate, depending upon the terms of your contract (keep reading to learn more.)

High-Water Mark

With this method, the FIA still provides a rate across a period of time. However, it doesn’t measure each change. Instead, the high-water mark method finds the highest point of the index within a set period of time. Then, the interest rate is provided based on the difference between this and the annuity’s index at the start of the timeframe.

Annual Reset

As its name suggests, this method is simple: You take the index value at the end of the contract year, compare it to the index value at the beginning of that year, and the rate is calculated based on that.

Participation Rate

Indexing methods determine which data points of the index are used for the annuity rates. Participation rates, meanwhile, tell you how much influence the index will have on the interest rate. The issuing insurance company sets the participation rate once you select your annuity. And, usually, this rate cannot change for a period of time. Furthermore, the details of your participation rate are specified in the contract. For example, it may change after a certain period of time, or it may be set to never go below a certain percentage.

Other Factors to Consider

In addition to the indexing method and participation rate, there are some other important annuity terms to consider. These include:

Floor/Minimum Interest Rate: It defines the lowest rate you can receive from your annuity.

Averaging: Rather than exacting point-to-point index values, averaging entails looking at the average values of the index over a certain period.

Cap Rate/Ceiling: Some FIAs come with a cap rate. This is the maximum interest rate that you can receive. Not all FIAs include this value, however.

Spread/Margins/Administrative Fee: This is a predetermined growth percentage, set aside before calculating the interest rate.

Do you have additional questions about FIAs? Messina’s Wealth Management can help! Contact us, to schedule a no-cost, no-obligation meeting to discuss with us, or to reserve a spot at one of our dinner seminars.

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