How the Monthly Sum Crediting Method Works in Fixed Index Annuities
The monthly sum crediting method is one way your insurance company can calculate returns on a fixed index annuity. The company will calculate the month-to-month percent change in the relevant market index, then add those values together (after factoring in any caps).
- Written by Melanie Pincus
- Edited By Sierra Campbell
- Published: April 29, 2025
- Updated: April 29, 2025
- 6 min read time
- This page features 3 Cited Research Articles
- The monthly sum credit method involves adding together 12 percent change calculations.
- In percent change calculations, monthly gains are typically subject to a cap, but losses are not.
- This crediting method is sensitive to market volatility but has high growth potential in steadily increasing markets.
What Is the Monthly Sum Crediting Method?
Insurance companies use crediting methods to determine how much interest to pay out to your annuity contract. The monthly sum crediting method, sometimes referred to as monthly point-to-point, involves calculating the percent change in an index’s value from one month to the next over a one-year period.
If the percent change is positive, it’ll typically have a cut-off point. For instance, you might see a 6% increase in the index’s value, but your annuity may only register a 4% change because of its rate cap. In contrast, negative returns won’t have a cap for the purposes of calculating your return.
The interest you’ll earn for the year will be the sum of all the (adjusted, as necessary) monthly percentage changes. If the sum is negative, the insurance company won’t take money out of your annuity — you just won’t get any interest credited. If the sum is positive, you’ll get earnings credited to your account.
How It Works in Practice
| Month | Starting Index Value | Percentage Change (Rounded to the Nearest Tenth) | Percentage Change, With 4% Cap Applied |
|---|---|---|---|
| August | 5,100 | -- | -- |
| September | 5,400 | 5.9% (5,400 - 5,100) / 5,100 | 4% |
| October | 5,700 | 5.6% (5,700 - 5,400) / 5,400 | 4% |
| November | 5,750 | 0.9% (5,750 - 5,700) / 5,700 | 0.9% |
| December | 6,000 | 4.3% (6,000 - 5,750) / 5,750 | 4% |
| January | 5,800 | -3.3% (5,800 - 6,000) / 6,000 | -3.3% |
| February | 6,000 | 3.4% (6,000 - 5,800) / 5,800 | 3.4% |
| March | 5,700 | -5% (5,700 - 6,000) / 6,000 | -5% |
| April | 5,000 | -12.3% (5,000 - 5,700) / 5,700 | -12.3% |
| May | 5,100 | 2% (5,100 - 5,000) / 5,000 | 2% |
| June | 5,300 | 3.9% (5,300 - 5,100) / 5,100 | 3.9% |
| July | 5,300 | 0% (5,300 - 5,300) / 5,300 | 0% |
| August | 5,400 | 1.9% (5,400 - 5,300) / 5,300 | 1.9% |
Take the sum of the values in the final column:
4% + 4% + 0.9% + 4% – 3.3% + 3.4% – 5% – 12.3% + 2% + 3.9% + 0% + 1.9% = 3.5%
So, you’ll earn a 3.5% return for the year in question. Even though the index saw a positive percent change in eight of the 12 months, the uncapped declines in three of the other months were significant enough to seriously bring down the overall interest rate for the year.
Consider if losses were also capped at 4%. In this case, the sum would have been 12.8%.
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Pros and Cons of the Monthly Sum Method
- High growth potential in certain markets
- When the financial market is experiencing steady increases and low volatility, the monthly sum method can produce strong returns.
- Frequent crediting opportunities
- Factoring in index changes from each month of the year can help spread out your risk compared to a method that compares the start of the year to the end of the year. You can still end the year with gains even if some months see losses.
- Upside participation without exposure to market losses
- If the market does well, you can benefit in the form of solid returns, even considering caps. In contrast, if the monthly sum method results in a number below zero, you won’t experience a loss.
- Cap on gain calculations
- Because the monthly sum method generally imposes caps on gains, you won’t see the full benefit of strong months in your final return.
- No cap on loss calculations
- While you can’t actually receive a negative return with the monthly sum method, you could have a month with a negative return of, say, 20% or higher that brings down or completely wipes out your gains for the year.
- May underperform in volatile or sideways markets
- In a volatile market, where the index moves unpredictably, or a sideways market, where there is no clear upward or downward trend, the monthly sum method can yield less-than-impressive returns.
Comparison to Other Crediting Methods
- Annual point-to-point: Instead of calculating the percent change from one month to the next over a 12-month period, the insurance company calculates the percent change in the index’s value from the start of the contract year to the end of the contract year. You’ll be protected if the market experiences mid-year volatility. Generally, this approach is helpful in strong bull markets (this is when a market index increases by 20% or more over a period of at least two months).
- Monthly average: The monthly average method measures the index 12 times, like the monthly sum method. But instead of calculating the percent change month to month, measured from the day your contract started, this method looks at the index value at the end of each month. Then, the insurance company finds the monthly average of those 12 numbers and compares that value to the starting index value to find the percent change. If the value is positive, you’ll get a credit to your contract (after any cap).
To get a better sense for the differences between these three methods, consider how each could perform in the hypotheticals outlined below.
| Market Status | Best Fit | Worst Fit |
|---|---|---|
| Volatile | Monthly average | Monthly sum |
| Bullish | Monthly sum or annual point-to-point | Monthly average |
| Bearish | Monthly average | Monthly sum, annual point-to-point |
Any of the above methods will work out just fine in a bull market, unsurprisingly. As markets rise, so too will the percent change used to calculate your annuity’s interest.
The monthly sum method is the riskiest when it comes to market volatility, and the monthly average method will yield the most stable returns regardless of market performance. In a truly declining market, you could get a 0% return with any of these methods.
Ideal Use Cases for Monthly Sum
The monthly sum crediting method is most appealing when market projections are positive. Steady growth over time is ideal.
Of course, this outcome can be hard to precisely predict. Investors who choose this crediting method should be willing to tolerate higher variability in exchange for the potential of higher growth. To accept this risk, the buyer needs to fully understand how capped gains and uncapped losses work in the context of fixed index annuities.
Important Considerations
If you purchase a fixed index annuities that earns with the monthly sum crediting method, know that the insurance company will likely cap positive returns but not cap negative returns when calculating your earnings for the year. While you’ll never have a negative return, this can seriously limit your upside.
Different insurers may impose different caps (and different participation rates), and these can change annually. Of course, the financial index that your fixed index annuity is linked to matters as well, as do the terms of your contract.
If you’re considering a fixed index annuity, you should consult a licensed financial professional. A financial professional can also help you decide whether the monthly sum crediting method is a good fit for your risk profile and overall financial strategy.
Editor Norah Layne contributed to this article.
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3 Cited Research Articles
- North American Company for Life and Health Insurance. (2025, January). How it works: Fixed index annuity crediting methods and index options. Retrieved from https://www.northamericancompany.com/documents/35457/9001800/13091Z+-+FIA+Crediting+Methods+and+Index+Options/55281f7e-eee8-4685-8e60-5427bf67e33d
- Allianz Life Insurance Company of North America. (n.d.). Understanding your fixed index annuity allocation options. Retrieved from https://www.allianzlife.com/what-we-offer/annuities/fixed-index-annuities/Understanding-your-fixed-index-annuity-allocation-options
- Pacific Life. (n.d.). Understanding Fixed Index Annuity Interest-Crediting Methods. Retrieved from https://www.annuities.pacificlife.com/content/dam/paclife/rsd/annuities/public/pdfs/guide/understanding-fixed-indexed-annuity-interest-crediting-methods.pdf