A fixed-index annuity provides the guarantees of fixed annuities, combined with the opportunity to earn interest based on changes in an external market index, for example the S&P 500, Nasdaq 100, and the Russell 2000. With a fixed-index annuity, because you’re not participating in the market, the money in your annuity (your “principal”) is not at risk. A fixed-index annuity may be a good choice if you want the opportunity for growth and accumulation, but don’t want to risk losing money in the market.

fixed-index annuity risk v reward


How a Fixed-Index Annuity Works

Most fixed index annuities have two phases. First, there’s an accumulation phase, during which you let your money earn interest. This is followed by a distribution or payout phase, during which you receive money from your annuity.

A fixed-index annuity also guarantees you will receive at least the minimum guaranteed interest credited to the contract. Remember that all of these guarantees are backed by the claims-paying ability of the issuing company.

Phase 1: Accumulation

The accumulation phase begins as soon as you purchase your annuity. Your annuity can earn a fixed rate of interest that is guaranteed by the insurance company or an interest rate based on the growth of an external index.

Phase 2: Distribution

The distribution phase of a fixed-index annuity begins when you choose to receive income payments. You can always take income payments. You can always take income in the form of scheduled annuitization payments over a period of time, including your lifetime. And many fixed-index annuities allow you to take income withdrawals as an alternative to annuitization payments. Either way, you can choose from several different payout options based on your personal needs, including options for guaranteed lifetime income.


A fixed-index annuity (FIA) offers a unique combination of benefits that can help you achieve your long-term goals. No other product offers the tax deferral, indexed interest potential, and optional benefits to protect your retirement assets and income.

Tax Deferral

Under current federal income tax law, any interest earned in your fixed-index annuity contract is tax-deferred. You don’t have to pay ordinary income taxes on any taxable portion until you begin receiving money from your contract. Withdrawals are taxed as ordinary income and, if taken prior to age 59 1/2, a 10% federal additional tax may apply.


Indexed Interest Potential

Fixed index annuities provide an opportunity for potential interest growth based on changes in one or more indexes. Because of this potential indexed interest, FIAs provide a unique opportunity for accumulation. And since the interest your contract earns is tax-deferred, it may accumulate assets faster. In addition to potential indexed interest, FIAs can offer you an option to receive fixed interest.



Fixed-index annuities offer you a level of protection you may find reassuring. That protection can benefit you in three separate ways:

  • Accumulation: Your principal and credited interests are protected.
  • Guaranteed Income: You can be protected from the possibility of outliving your assets.
  • Death Benefit: If you pass away before annuity payments begin, a fixed annuity may help you provide for your loved ones.



Insurance Company

This is the company that issues the annuity. The insurance company is responsible for backing the annuity’s guarantees.

Contract Owner/Annuitant

These usually are the same person, but they can be different. The owner makes decisions about the annuity, such as who the beneficiaries are. The annuitant is the person whose life expectancy is used to calculate annuity payments.


The beneficiary is the person who receives the annuity’s death benefit. Naming one or more beneficiaries other than the estate is important because without a beneficiary, the money in your annuity could be subject to probate.

Is a Fixed-Index Annuity Right for You?

The answer is, “maybe.”

Only you know your goals for retirement, so only you can determine your needs. A fixed-index annuity isn’t the right solution for everyone, and you shouldn’t buy one unless it’s appropriate for your situation.

You may want to consider a fixed index annuity if the following benefits are important to you:

      • Tax deferral to help you reach your retirement goals
      • Indexed interest potential to help accumulate your retirement savings
      • Protection benefits that can help protect your retirement assets and income

Purchasing an annuity is an important decision, and one you should only make after consulting with your financial professional.

Because the guarantees on an annuity are important, it’s important to consider who backs those guarantees. The guarantees are backed solely by the insurance company that issues the annuity. That’s why you should know about the financial strength and stability of the company. Ask about their:

  • Ratings – independent agencies’ opinions of a company’s strength and ability to meet its ongoing insurance policy and contract obligations.
  • Risk Management Capabilities – a company’s track record of successfully hedging against potentially extreme market events.
  • Management Philosophy – a company’s commitment to stability and reliable, long-term performance.