What is the Monthly Average Option in a Fixed Indexed Annuity

The honest reason monthly averaging exists has less to do with taming a wild market and more to do with protecting you from one specific kind of bad luck: a strong year undone by a single unfortunate measurement date. A point-to-point contract only cares about two numbers — the index value on the day your contract started, and the index value on the day the crediting period ends. If the market rallied all year and then dropped sharply the week before your anniversary, that single data point is all point-to-point sees. Monthly average was built to take that specific risk off the table by replacing one ending reading with twelve, spread across the year.

Jason Stolz, CLTC, CRPC, DIA, CAA, is Chief Underwriter at Diversified Insurance Brokers and has spent real time walking clients through exactly how monthly average and its close cousin, monthly sum, diverge from identical market data despite sharing “monthly” in the name. As an independent annuity broker working across dozens of carriers, our office can run the actual math on a specific contract you’re comparing, rather than leaving you to guess at what “smoothing” really means for your account.

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Figures above are illustrative only and don’t represent any specific product, index, or currently offered rate. The two methods process identical monthly data through genuinely different math and can land on meaningfully different numbers.

The Mechanic, Precisely

Monthly average records the index’s closing value at the end of each of the twelve months in a crediting period, adds all twelve of those values together, and divides by twelve to produce a single average index level for the year. That average — not any individual month’s value, and not the final month’s ending value — is what gets compared against the index’s level on the day the crediting period began. The percentage difference between the starting value and the average is the raw index change, and it’s this one blended number, calculated once, that then has a single participation rate applied to determine the actual credited interest.

That last detail matters more than it sounds like it should. Monthly average makes twelve observations but performs its adjustment — typically a participation rate rather than a cap — exactly once, on the final blended figure. Its close relative, monthly sum, does the opposite: it applies a cap twelve separate times, once to each month’s individual result, before adding everything together. Same number of monthly observations, completely different point in the calculation where the limiting factor gets applied.

Why This Design Exists: Protecting Against One Bad Day

A point-to-point contract’s entire result rests on two dates: the day the term began and the day it ends. That simplicity is exactly what makes it vulnerable to a specific kind of misfortune — a year of genuine market strength that happens to end on a down week. A rally that ran from January through November means nothing to a point-to-point calculation if the index falls sharply in the final days before the measurement date; the credit reflects wherever the index happened to land on that one specific day, not the strength of the year that preceded it.

Monthly average exists to take that particular risk off the table. By replacing a single ending reading with twelve readings spread evenly across the year, no single day, good or bad, can dominate the result the way it can under point-to-point. A sharp decline in the final weeks of the term still pulls the average down, but only by roughly a twelfth of its full weight, since eleven other months of data are sitting alongside it. This is the genuine, honest rationale for why this method was built, distinct from simply being a gentler or more conservative choice for its own sake.

The Trade That Comes With It

The same averaging that protects against a bad final reading also discounts a genuinely strong, steady climb, and it’s worth being direct about that rather than treating it as a footnote. In a year where the index rises consistently from start to finish, an average built from twelve readings taken along the way will always sit below the final, highest value, simply because most of those readings were captured while the index was still lower than where it ultimately finished. The table above shows this in miniature: the underlying monthly data nets out to real gains in most months, yet the blended average comes in at roughly 5%, meaningfully below what a point-to-point measurement of the same year would likely show. This isn’t a flaw in the design — it’s the direct, unavoidable consequence of the same mechanism that provides the downside protection in the first place.

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Monthly Average vs. Monthly Sum: One Cap, or Twelve

These two methods get confused constantly, and the table above shows exactly why it’s worth working through the distinction with real numbers rather than assuming similar names mean similar outcomes. Monthly average performs one calculation on one blended figure at the end of the year. Monthly sum performs twelve separate calculations, capping each month’s gain individually while letting every loss pass through uncapped, then adds the results together. On identical underlying data, these two approaches can land on genuinely different credited amounts — in the scenario above, monthly sum actually credits more than monthly average, which runs counter to any assumption that “sum” sounds riskier than “average.” Our dedicated look at how the monthly sum method actually works covers its own distinct risk profile in full, including why independent analyses generally describe it as the more volatile of the two despite this particular illustration favoring it.

Monthly Average vs. Daily Average

Monthly average sits in the middle of a broader smoothing spectrum, not at either extreme. Point-to-point uses two data points and reacts fully to wherever the index lands on the final day. Daily average uses roughly 252 data points and pushes the same averaging logic to its extreme, discounting a steady climb even more heavily than monthly average does while offering even stronger protection against a late-term reversal. Monthly average’s twelve monthly readings land deliberately between those two poles — enough smoothing to remove the single-day risk that makes point-to-point uncomfortable for some buyers, without diluting a genuine bull market quite as aggressively as daily sampling does.

How the Crediting Period Applies

Monthly average runs on a crediting period exactly like every other strategy — commonly one year, defining the twelve months that get averaged together. Our full explanation of how a crediting period actually works covers what happens at renewal, including how the participation rate applied to the blended average can change from one term to the next.

Where This Fits Among the Broader Menu

Monthly average is one entry among several on most fixed indexed annuities. Our overviews of cap rates, participation rates, and spread rates cover the formulas most often paired with this method, and our broader look at indexed annuity crediting methods ties the full lineup together in one place.

Who Genuinely Benefits From Monthly Average

A buyer who’s specifically uncomfortable with point-to-point’s dependence on a single measurement date, and who would rather accept a somewhat lower credit in a strong, steady bull market in exchange for real protection against a late reversal, is the clearest fit for this method. It suits someone who prioritizes predictability across a range of outcomes over maximizing the result in the single best-case scenario. It fits poorly for a buyer whose primary goal is capturing as much of a sustained upward market as possible, since the table above shows plainly how much of a genuinely positive year can get discounted by the averaging process.

How We Help

We run monthly average against point-to-point and monthly sum on the same underlying data before recommending any of them, because the honest answer to which method is better depends entirely on what the market actually does, not on which one sounds gentler by name. If protecting against a bad measurement date matters more to you than squeezing out the last percentage point of a strong year, we’ll show you exactly what that trade-off costs and what it buys.

Our broader guidance on choosing the right annuity and genuine annuity suitability reflects the same discipline we bring to this comparison. If you already hold an indexed annuity and have never confirmed which crediting method your allocation actually runs on, our second-opinion review is built for exactly that question, and if the answer points toward a different contract entirely, our guide on replacing an annuity the right way walks through that decision honestly.

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