What Is Annual Reset?
Annual reset is one of the most common crediting methods used in fixed indexed annuities. At the end of each contract year, the insurance company measures how much the linked index has gained or lost since the start of that year. Any gain (subject to the cap, participation rate, or spread) is credited to your accumulation value and locked in permanently. Then the index level is reset to its current value, which becomes the new starting point for the next contract year.
The Lock-In Advantage
The key benefit of annual reset is that gains are protected once they are credited. If the index earns 6% in year one and -20% in year two, your accumulation value keeps the year-one gain. The year-two loss does not take anything back. The floor in most FIA contracts ensures that the worst crediting outcome for any single year is 0%, not a negative number.
How Annual Reset Compares to Other Crediting Methods
Some annuities use a point-to-point measurement over the entire contract term (such as five or seven years) rather than resetting annually. In those designs, a down year near the end of the term can reduce what you earn, since the measurement spans the whole period. Annual reset avoids that risk by treating each year independently.
Things to Keep in Mind
Annual reset does not mean you can withdraw your gains every year without cost. Surrender charges may still apply to withdrawals above your free withdrawal amount during the surrender period. The reset simply means that from a crediting standpoint, each year starts fresh.
Understanding the crediting method in your contract is important when comparing annuities. Annual reset is widely considered a consumer-friendly design because it protects against sequence-of-returns risk within the accumulation phase.