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How Does this Translate Into Interest Crediting

Interest earnings are credited using an index crediting strategy. The three most common index crediting formulas are:

• The Annual Monthly Average Method is linked to the performance of an index over a 12-month period, then averages the movement in order to determine the annual percentage change. The value may be adjusted by an annual cap or annual spread, if any.

• The Annual Point-to-Point Method is linked to the performance of the index and the measuring of the annual percentage change between "starting" and "ending" points. This value may be adjusted by an annual cap or participation rate.

• The Annual Monthly Cap Method sums both the monthly index increases (up to the Interest Rate Cap) and monthly index decreases in the index to which it is linked over a 12 month period to determine the annual percentage change. If the sum of 12 monthly changes is positive, that’s the interest credit.

Regardless of which index crediting strategy is used, most share a similar "interest calculation".

For example, a typical process is outlined here::

1. The index movement is measured over a specific index term (usually one year).

2. The annual percentage change, if any, is calculated.

3. The annual percentage change is adjusted by the interest rate cap, participation rate, or annual spread.

5. If the resulting interest calculation is negative, the interest credit is zero.

Here is an example using a \$100,000 initial deposit:

 HYPOTHETICAL EXAMPLE #1 Index Value at "Starting Point" 1,200 Index Value at "Ending Point" 1,380 Annual Percentage Gain Equals 15% Contract Value at "Starting Point" \$100,000 Adjustment 8% Interest Rate Cap Amount Credited to Contract Values \$8,000 = \$100,000 x 8% Contract Value at "Ending Point" \$108,000 Index Value at "Reset" 1,380

Now what if the Market suffers a loss?

In the prior example, you saw how interest credits are credited to contract values following an increase in the index. Well, what would happen to contract values if the index suffered a loss? The answer is simple. Contractholders would be credited with 0% interest (protecting them against loss to their principal); the "starting value" of the index would be reset; and a new Index Term would begin.

Let’s use the same hypothetical example to see how this works. Again, let’s assume an initial premium of \$100,000 and use the Annual Point-to-Point index crediting formula.

 HYPOTHETICAL EXAMPLE #2 Index Value at "Starting Point" 1,200 Index Value at "Ending Point" 980 Annual Percentage Change Equals -10% Contract Value at "Starting Point" \$100,000 Adjustment 0% Interest minimum allowed Amount Credited to Contract Values \$0 = \$100,000 x 0% Contract Value at "Ending Point" \$100,000* Index Value at "Reset" 980

*Despite a loss in the index of 10 percent, there is no loss in contract value!

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