A fixed indexed annuity (FIA) is an insurance contract that protects your principal from market losses while crediting interest based on the performance of a market index (such as the S&P 500®) using caps, participation rates, or spreads. If you want downside protection with the potential to earn more than a traditional fixed rate, understanding what a fixed indexed annuity is—and how it’s credited—can help you decide where it fits in your retirement plan.

What Is a Fixed Indexed Annuity (Definition)

An FIA credits interest using an index formula rather than a fixed rate. You never own the underlying index and dividends are not included, but your account receives credited interest (if any) based on rules set in the contract. The floor is 0% in most strategies—so no market loss to your principal from index downturns—while upside is limited by a cap, participation rate, or spread.

How Fixed Indexed Annuities Work

• Crediting methods: Annual point-to-point, monthly sum, performance triggers, and volatility-controlled indices are common.
• Levers: Caps limit the percentage you can earn; participation rates give you a slice of the index gain; spreads subtract a set percentage from the index result.
• Resets: Most strategies “reset” annually—gains lock in and new terms apply for the next period.
• Principal protection: Index losses do not reduce your principal or prior credited interest; early, excess withdrawals can still incur surrender charges.
• Tax deferral: Interest grows tax-deferred (non-qualified money); IRAs follow IRA rules.

Why Choose a Fixed Indexed Annuity?

• Downside protection: Zero floor avoids market loss.
• Upside potential: Opportunity to earn more than a fixed rate over time, subject to caps/participation.
• Income options: Many FIAs offer guaranteed lifetime withdrawal benefit (GLWB) riders or the option to annuitize later.
• Flexible allocations: Split among multiple index strategies and a fixed bucket for balance.

What to Watch For

• Complexity: Understand the index strategy, cap, participation rate, and spread before you buy.
• Surrender period: Access is typically limited during the term; most contracts allow 10% free withdrawals annually.
• Rider costs: Income or enhanced-benefit riders can add ongoing fees—use only when they improve your plan.
• Changing terms: Caps/participation can change at anniversaries; the policy defines guaranteed minimums.

Fixed Indexed Annuity vs Fixed Annuity vs Variable Annuity

Who Should Consider a Fixed Indexed Annuity?

• Conservative investors seeking principal protection with potential for higher credited interest than a fixed rate over time.
• Pre-retirees and retirees planning to add a lifetime income rider or annuitize later.
• Savers moving cash or CDs into protected growth with tax deferral.

Preview Income Scenarios

Many clients use an FIA for protected growth, then add a GLWB rider or annuitize when income is needed. Use the tool to explore illustrations; we’ll confirm carrier specifics in your quote.

FAQs: Fixed Indexed Annuities