Both products are fixed deferred annuities from an insurance company. A traditional fixed annuity credits a rate the insurer declares. A fixed indexed annuity credits interest from a formula tied to an index change, after limits, and typically credits zero for a down term if you do not withdraw. Neither one puts you in the stock market. Neither one is FDIC insurance.

Where the interest number comes from

On a declared-rate fixed annuity, the insurer tells you the rate for a period. When that period ends, the insurer sets another rate, subject to a minimum the contract states. You are not promised that the renewal will match the first year. You are promised whatever minimum the contract actually contains.

On a fixed indexed annuity, the insurer does not declare the credit in advance as a single rate, except for the minimum guarantees. The credit depends on the index measurement and on the cap, participation rate, or spread. The SEC’s illustrations are the cleanest way to see the limits: 75 percent of a 10 percent index change is 7.5 percent; a 7 percent cap on a 12 percent change pays 7 percent; a 3 percent spread on a 9 percent change leaves 6 percent. FINRA repeats the 12 percent / 7 percent cap example and adds a separate 3.5 percent spread on a 10 percent gain. Those are hypotheticals. They show why an indexed contract can credit more than a low declared rate in a strong index year and less than the index itself. They do not show that it will beat a declared-rate annuity over any period you care about.

Dividends are usually out of the indexed formula. The SEC’s illustration — 7 percent total return, 2.5 percent dividends, 4.5 percent measured — is a reminder that “the market was up 7” is already the wrong input. A declared-rate annuity does not use that input at all. Comparing either contract with a stock-index fund is a comparison across different risks, different taxes, and different guarantees.

Down years and locked credits

The NAIC Buyer’s Guide says that if the index declines, the indexed contract typically credits zero for that term when you do not withdraw, and that interest already credited is usually locked. A declared-rate contract does not go to zero merely because an index fell; it credits the rate that was set, which could be a small positive number. In a down index year, the declared-rate contract can credit more. In a strong index year, the indexed contract can credit more, up to its limiter. String those years together and the winner depends on the path and on the renewal rates. This site will not pick a winner.

Shared contract features

Both can have surrender charges that last for years. The SEC’s “often six to ten years or longer” description is about indexed annuities; declared-rate contracts have their own schedules, and you should read both rather than assuming they match. Both can offer a free-look period, often 10 to 30 days, with the refund depending on the state. Both can include a market-value adjustment or not. Both rely on the insurer’s ability to pay. FINRA states that annuities are not FDIC or SIPC insured.

Both are subject to nonforfeiture rules that differ by state. FINRA described a usual minimum rate of 1 percent to 3 percent on at least 87.5 percent of premium. NAIC Model 805’s formula can go to 0.15 percent before an extra equity-index reduction. Neither figure is “the interest you will be credited” on an indexed contract in a good year, and neither is a reason to ignore the declared rate on a traditional fixed contract.

How to compare two illustrations without fooling yourself

Line up the guaranteed minimums, not the hypothetical columns. Line up the surrender schedules year by year. Line up any rider charge, which the NAIC treats as an extra cost for lifetime income that is not the same as cash value. Ignore any average return a salesperson states unless they can show the method, the years, and the renewal caps that were actually in force. If they cannot, the average is a story.

If the indexed proposal wins only in the column that assumes the current cap lasts for a decade, ask for the column that uses the guaranteed cap. If the declared-rate proposal wins only because its first-year rate includes a bonus that disappears, ask for the rate after the bonus period. The bonus page explains why this site will not fill that number in for you.

Sources

Not advice. IndexedAnnuity.com is not an insurance company, agency, broker-dealer, or tax advisor. Nothing here is a recommendation to buy, hold, or replace a contract. Guarantees exist only in a specific contract and depend on the insurer’s ability to pay. Products and state laws differ. Read the contract.
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