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.

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.