Retirement · Annuities
How does an indexed annuity
differ from a fixed annuity?
A fixed annuity credits a declared interest rate, so you know the number in advance. A fixed indexed annuity credits interest linked to a market index, with a floor that protects against index declines and a cap, spread or participation rate that limits the upside. One trades upside for certainty. The other trades certainty for the chance of more.
Quick answer
- A fixed annuity credits a declared rate for a term. Predictable, and you know it up front.
- A fixed indexed annuity credits interest linked to an index, measured by a crediting method such as point to point.
- The indexed version has a floor, usually zero percent, so a negative index result does not reduce principal because of index performance.
- Its upside is limited by a cap, a spread or a participation rate, which vary by contract and carrier.
- Neither one invests you in the market. In both cases you hold a contract with an insurance company.
- Both are long term contracts with surrender charges, and both depend on the claims paying ability of the issuing carrier.
- The practical difference is certainty against the chance of a higher credit in a good year.
The two side by side
Fixed annuity
Like a certificate of deposit with an insurance company: a declared interest rate for a term, known in advance. Suits someone who wants principal protection and a predictable number more than upside.
Fixed indexed annuity
Interest linked to a market index such as the S&P 500, with a floor, usually zero percent, and a limit on the upside. Suits someone who wants index linked growth without exposure to index declines.
What is the same about both
You are not in the market in either. You hold a contract with an insurance company, and what that contract promises rests on the carrier's claims paying ability. Both are long term arrangements with surrender charges for leaving early, and both are designed to be held for the term rather than traded.
Both also sit inside a tax deferred wrapper, so the growth is not taxed as it is credited. How and when it is taxed on the way out depends on how the contract is funded and how you take the money.
Where the difference actually shows up
In a flat or falling year, the fixed annuity credits its declared rate and the indexed one likely credits little or nothing, though the floor means index performance alone does not cut into principal. In a strong year the indexed contract can credit more, but only up to whatever its cap, spread or participation rate allows.
So the question is not which is better. It is which trade you want to make, and whether you can live with a year that credits nothing in exchange for the chance of a better year later.
What to read before you decide
For a fixed annuity: the declared rate, the term, and what happens at renewal. For an indexed one: the crediting method, the cap or spread or participation rate, the guaranteed limit on those, and when they can change. For both: the surrender schedule and the carrier. The wider comparison across annuity types is on the annuities overview.
Frequently asked questions
How does an indexed annuity differ from a fixed annuity?
A fixed annuity credits a declared interest rate you know in advance. An indexed annuity credits interest linked to a market index, with a floor against index declines and a cap, spread or participation rate limiting the upside.
Is an indexed annuity riskier?
It is less predictable rather than more exposed to the index. The floor, usually zero percent, means a negative index result does not reduce principal because of index performance. What you give up is the certainty of a declared rate.
Am I invested in the stock market?
No, in neither case. You hold a contract with an insurance company. In an indexed annuity the index is a measuring stick for the interest credited, and you do not receive the index's dividends.
Which one is better?
Neither, on its own. A fixed annuity suits someone who wants a known number. An indexed annuity suits someone willing to accept a year that credits little for the chance of more in a strong year.
What do they have in common?
Both are long term contracts with surrender charges, both grow tax deferred, and both depend on the claims paying ability of the issuing insurance company.
Educational content only. Annuities are long-term contracts with surrender charges. Read the contract before purchasing. Crediting methods, caps, spreads and participation rates vary by contract and by carrier, and any guarantees depend on the claims paying ability of the issuing insurance company.
Have the contract in front of you?
We will read the crediting terms with you and tell you what they actually do, whether you bought it from us or not. Start with the annuities overview, or call +1 (586) 899-1003.
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Sources
Your contract and its product disclosure are the authority on the terms described here.
Educational content only.