Home Life insurance Annuities Equity-indexed annuities: Indexing methods explained Equity-indexed annuities: Indexing methods explained By Insure.com | Posted on December 7, 2009 Why you should trust Insure.com Quality Verified At Insure.com, we are committed to providing honest and reliable information so that you can make the best financial decisions for you and your family. All of our content is written and reviewed by industry professionals and insurance experts. We maintain strict editorial independence from insurance companies to maintain editorial integrity, so our recommendations are unbiased and are based on a comprehensive list of criteria. The equity-indexed annuity (EIA) was introduced in 1995 and became a fast-growing alternative to fixed-rate annuities and certificates of deposits. EIAs provide a guaranteed interest rate combined with the ability to earn a percentage of certain market-driven indexes, borrowing characteristics from fixed-rate and variable-rate annuities. The percentage of the index’s gain that a customer receives is called the “participation rate.” There are many ways insurance companies calculate your index-linked returns. Here are the most common: The point-to-point method compares the values of the index at two distinct points, such as the end and beginning of the contract term, ignoring all the fluctuations in between. This can protect you against declines in the middle of the term, but it can be a drawback if the index increases throughout most of the term and then drops dramatically the last day. The high-water-mark method notes the index level at various points during the term, usually the policy anniversary dates, and then compares the highest level to the start date to calculate earnings. The low-water-mark method examines the index at certain points during the term, such as policy anniversary dates, and compares the index at the end of the term to the lowest overall index value. Interest is credited based on the difference between the index value at the beginning of the term and the lowest index value. Both the high-water and low-water methods tend to lessen the risk of market declines. The annual reset, or ratchet, method compares the index at the beginning of the contract year with the end of the contract year. Any resulting decreases are ignored, and your gain is locked in each year. QuickTake Annuity lifetime payouts: How much will you get? What is an annuity? What to know about the retirement income option Annuities articles: How to buy wisely The ups and downs of immediate variable annuities Waivers provide access to your annuity before retirement Annuity Surrender: Getting out of your annuity See more > Related Articles What happens if you outlive your term life insurance? By Shivani Gite What is indexed universal life insurance? By Shivani Gite Savings+ By Wysh 2023 Review: A High-Yield Savings + Life Insurance Combo By Insure.com What is final expense insurance and how does it work? By Desiree Ghazi Types of life insurance By Huma Naeem The different types of term life insurance policies explained By Nupur Gambhir Get instant quotes now ! Please enter valid zip Get Quotes