How Indexed Annuities Work and Who Should Consider Them
Many people approaching retirement want market growth but fear the risk of loss. That’s where learning how indexed annuities work(FIAs), and that they offer a unique balance, can benefit you in retirement. FIAs are insurance products that credit interest based on the performance of a market index—like the S&P 500—while guaranteeing your principal won’t lose value due to market downturns. You benefit from a portion of the upside with none of the downside risk.
Unlike variable annuities, Fixed Indexed Annuities are not invested directly in the market. Instead, your gains are calculated using crediting methods such as caps, participation rates, or spreads. This structure provides a way to enjoy some growth when markets are strong—while maintaining protection when they’re not. It’s a great middle ground for pre-retirees and retirees seeking stability and upside potential.
FIAs often come with optional income riders that provide guaranteed lifetime income, making them a powerful tool for retirement income planning. These riders grow based on a separate income calculation—sometimes including bonuses or rollups—allowing you to secure future income even if the index underperforms.
At Diversified Insurance Brokers, we help you compare indexed annuities across multiple carriers to find the structure, rate, and rider options that best fit your retirement goals. We break down the details so you understand how your annuity works before you ever sign.
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FAQs: How Indexed Annuities Work
What is a fixed indexed annuity?
A fixed indexed annuity is a deferred annuity where your growth is tied to an external market index, such as the S&P 500. Your money is never invested directly in the market, and your principal is protected from losses while you can earn interest based on index performance.
Can I lose money in an indexed annuity?
No. Indexed annuities protect your principal from market losses. Even if the linked index performs poorly, your credited interest cannot drop below zero for that period (though fees may apply to income riders).
How does interest growth work?
Interest is credited based on index performance using methods such as caps, participation rates, or spreads. These tools limit the upside but ensure no downside, creating a balance of growth potential and protection.
What is a participation rate?
A participation rate determines what percentage of the index gain is applied to your annuity. For example, if the index gains 10% and the participation rate is 50%, you would be credited 5% for that period.
What is a cap rate?
A cap rate sets the maximum credited interest for a period. If the cap is 7% and the index returns 12%, your credit is capped at 7%.
What is a spread or margin?
A spread (also called a fee or margin) is a percentage subtracted from the index gain. If the index gains 10% and the spread is 2%, your credited interest would be 8%.
How often is interest credited?
Interest is usually credited annually, though some carriers offer monthly or multi-year crediting based on the specific index strategy. Annual point-to-point is one of the most common methods.
Do indexed annuities have fees?
The indexed account itself typically has no direct fees. However, optional income riders or enhanced benefits may come with an annual fee. These fees do not affect your principal but can impact the overall growth.
Are indexed annuities good for retirement income?
Yes. Many fixed indexed annuities offer built-in or optional income riders that create guaranteed lifetime income. These riders grow at a contractually guaranteed rate (separate from index growth) and provide predictable retirement income.
Who should consider an indexed annuity?
Indexed annuities are ideal for savers who want market-linked growth without market risk. They work well for pre-retirees and retirees seeking principal protection, tax-deferred growth, and optional income guarantees.
About the Author:
Jason Stolz, CLTC, CRPC, is a senior insurance and retirement professional with more than two decades of real-world experience helping individuals, families, and business owners protect their income, assets, and long-term financial stability. As a long-time partner of the nationally licensed independent agency Diversified Insurance Brokers, Jason provides trusted guidance across multiple specialties—including fixed and indexed annuities, long-term care planning, personal and business disability insurance, life insurance solutions, and short-term health coverage. Diversified Insurance Brokers maintains active contracts with over 100 highly rated insurance carriers, ensuring clients have access to a broad and competitive marketplace.
His practical, education-first approach has earned recognition in publications such as VoyageATL, highlighting his commitment to financial clarity and client-focused planning. Drawing on deep product knowledge and years of hands-on field experience, Jason helps clients evaluate carriers, compare strategies, and build retirement and protection plans that are both secure and cost-efficient.
