The monthly point-to-point crediting method, often shortened to “monthly sum,” calculates a fixed indexed annuity’s annual interest by taking twelve monthly snapshots of a stock index, capping each month’s gain at a set maximum, recording each month’s loss at its full value, and adding the twelve results together at the end of the contract year. If the sum is positive, that figure is credited as interest. If it’s negative, the account earns zero for the year but doesn’t lose principal. The asymmetry between capped gains and uncapped losses is the defining feature, and it makes this the most volatility-sensitive crediting option a fixed indexed annuity offers.
How the Twelve Monthly Measurements Work
The carrier records the chosen index’s value on the same calendar day each month for twelve consecutive months, starting from the contract issue date or the most recent anniversary. Each month, the ending index value is compared to the prior month’s ending value and expressed as a simple percentage change. That raw number is the month’s performance before any contract adjustments apply.
If your contract was issued on the 15th, every measurement falls on the 15th, or the next business day if markets are closed. Twelve data points capture more market movement than a single annual comparison, so the method can pick up short rallies that an annual point-to-point approach would miss by only looking at the start and end of the year.
One detail that surprises buyers: when the index is the S&P 500, the contract almost always tracks the price return version, which excludes dividends. Historically dividends have made up a meaningful share of the S&P 500’s total return, so the index gains on your annuity statement will look smaller than the headline market numbers you see in the news. This applies to nearly all fixed indexed annuity crediting methods, not just monthly sum.
How the Cap Trims Each Positive Month
Every positive monthly percentage is trimmed to a maximum called the monthly cap. Caps vary by carrier and economic conditions, but a range of roughly 1.5% to 3.0% is common. If the index jumps 5% in a month and your cap is 2%, that month contributes 2% to the running total. The other 3% drops out of the calculation.
Carriers set caps based on the cost of the index options they buy to fund the strategy. When interest rates are high and options are cheaper, caps rise. When rates fall, caps shrink. Most contracts guarantee the cap for one year at a time, and on each anniversary the carrier can reset it for the next twelve-month cycle.
Participation Rates and Spreads
Some contracts layer a participation rate on top of the cap. A participation rate of 80% means the account credits 80% of each month’s index gain before the cap is applied. If the index rises 4% in a month at an 80% participation rate, the starting figure is 3.2%. That 3.2% is then compared to the monthly cap, and if the cap is 2.5%, the recorded gain for that month is 2.5%.
A spread, sometimes called a margin, works differently. The carrier subtracts a flat percentage from the index return instead of multiplying it. A 2% spread on a 10% gain leaves 8%. If the gain is smaller than the spread, no interest is credited for that period. Spreads are more common in annual point-to-point strategies than in monthly sum methods, but some carriers use them in combination with monthly caps.
Both participation rates and spreads can be reset by the carrier on each contract anniversary within the guaranteed minimums and maximums written into the contract.
Why Losing Months Are the Real Risk
This is where the math gets harsh. Positive months get capped. Negative months do not. A month where the index drops 8% hits the running total at the full negative 8%, even though the best a positive month could contribute might be 2% or 2.5%.
A simplified example makes the asymmetry visible. Suppose the monthly cap is 2.5%. Over twelve months, the index posts gains in nine months and losses in three. Each gaining month hits the cap, contributing 2.5% × 9 = 22.5%. The three losing months produce drops of 6%, 4%, and 5%, totaling negative 15%. The net annual sum is 22.5% − 15% = 7.5%, a solid year. Now change one of those losing months to a 15% decline. Total losses become 24%, the annual sum flips to negative 1.5%, and the account earns zero for the entire year.
One sharp monthly decline can wipe out an entire year of capped gains. In choppy or volatile markets, an annual point-to-point method often outperforms monthly sum because it only cares about where the index starts and ends and ignores the turbulence in between.1Allianz Life. Understanding Your Fixed Index Annuity Allocation Options
The Annual Sum and the 0% Floor
At the end of the twelve-month cycle, the carrier adds all twelve adjusted monthly percentages together. If the sum is positive, that percentage is credited to the contract value as interest. If the sum is negative, the carrier applies a 0% floor, meaning no interest is credited but the account doesn’t lose money. That floor is the central protection of a fixed indexed annuity.
The floor applies to the annual total, not to each individual month. Negative months absolutely count inside the running total. The protection only shows up when the twelve months are tallied. If you look at a mid-year statement showing a negative running sum, that doesn’t mean your account is losing value. It means the method hasn’t produced any creditable interest yet for the current cycle.
Behind the 0% floor sits a regulatory backstop. The Standard Nonforfeiture Law for Individual Deferred Annuities requires carriers to maintain a minimum guaranteed contract value of at least 87.5% of premiums paid, accumulated at a modest interest rate tied to the five-year Constant Maturity Treasury Rate, reduced by up to 225 basis points for contracts with index-linked benefits.2National Association of Insurance Commissioners. Standard Nonforfeiture Law for Individual Deferred Annuities In practice the 0% annual floor keeps contract values well above this minimum, but the guarantee sits underneath as a safety net.
What the Annual Reset Does
Once interest is credited at the end of a contract year, it becomes part of the permanent contract value. If the index falls the next year, previously credited interest doesn’t disappear. The next cycle starts fresh from the new, higher base, and prior gains are never at risk from future market declines.
The reset recalculates the index starting point too. Even after a year the method credits 0%, the next year’s measurement begins at the current index level, not the pre-decline level. The market doesn’t need to recover lost ground before the method can start generating interest again.
When the Monthly Sum Method Pays Off
The method rewards a specific kind of market: steady, moderate gains with few sharp declines. In a year where the index climbs 1% to 2% most months without a major selloff, the twelve small capped gains can add up to meaningful interest even if the total annual return is modest by historical standards. The frequent crediting opportunities capture upward momentum that an annual measurement would compress into a single number.
It’s a poor fit for volatile markets. A year with strong overall returns but a few ugly months in between can easily produce a 0% credit through monthly sum, while an annual point-to-point method on the same contract would have captured the full net gain, subject to its own annual cap. No single crediting method wins in every environment, which is why many carriers offer multiple methods inside the same contract and let you allocate premium across them.1Allianz Life. Understanding Your Fixed Index Annuity Allocation Options
If your contract offers both monthly sum and annual point-to-point, splitting the allocation between them hedges against both steady-climb and volatile-recovery scenarios. Before committing, confirm the current monthly cap and any participation rate or spread in writing, and ask what the guaranteed minimums are for each. The cap you buy into today is the cap for one year only. The guaranteed minimum is what you are stuck with if conditions move against you over a decade.