A variable annuity and a fixed indexed annuity are both insurance contracts, and both can defer tax. The money inside them is not exposed to markets in the same way. Mixing them up is how people end up surprised. A third product, the registered index-linked annuity, belongs in neither column.

What moves the account

In a variable annuity, you allocate premium to investment options, often subaccounts that work like mutual funds. The account value moves with those options. It can go down because the market went down, and it can go down because of fees, even in a flat market. The contract is a security. You should receive a prospectus. FINRA’s annuities overview treats variable annuities as securities with investment risk.

In a fixed indexed annuity, you do not allocate premium to stock funds. The SEC bulletin says the insurer credits interest based on an index change, and that you do not own the index. If the index falls over the term and you do not withdraw, the NAIC guide says the credit is typically zero, not a negative percentage. Interest already credited is usually locked. You also do not receive the index’s full increase. Caps, participation rates, and spreads cut it. Dividends are usually excluded. The SEC’s dividend illustration — 7 percent total return, 2.5 percent dividends, 4.5 percent used by many formulas — is the clean way to see that gap. It is an illustration, not a yield.

Fees, stated without fake averages

Variable annuities charge fees that the prospectus lists: mortality and expense charges, fund expenses, and optional rider charges are the categories FINRA and the prospectus tradition describe. This site will not quote an average fee. Averages hide the contract you were offered, and a stale average is worse than none.

Fixed indexed annuities often do not show a mutual-fund expense ratio, because you are not in a fund. They can still cost you through a surrender charge, a spread, a rider charge, or a participation rate below 100 percent. The SEC’s stacked hypothetical — 75 percent participation and a 3 percent spread on a 10 percent index change, leaving 4.5 percent — is a cost relative to the index, not an annual fee deducted in dollars. Ask for both kinds of cost. A contract can be expensive in the way it limits credits even when a fee table looks short.

Do not file a RILA under either name

A registered index-linked annuity, sometimes sold as a buffer annuity, can apply a negative index result to your account. The SEC’s indexed-annuity bulletin says that not all indexed annuities are regulated by the SEC, and that the ones that are securities can expose you to investment losses. A buffer or a floor on a RILA is a limit on loss, not a promise of zero loss. Principal can go down. The product is a security. If a brochure uses “index” and also uses “buffer,” “floor,” or “registered,” stop and read whether negative performance reduces the account. That contract is outside the fixed indexed design this site is describing, and it is not a variable annuity either. It is a third thing, with its own prospectus.

Shared cautions

Both variable and fixed indexed annuities can lock you in with surrender charges. Replacing either one can start a new surrender period, which is FINRA’s replacement warning. Both depend on the insurer for the insurance guarantees, even though a variable annuity’s separate account is invested differently from the insurer’s general account. Neither is FDIC or SIPC insurance. Tax deferral inside an IRA is usually redundant for both, which is FINRA’s point about annuities in retirement plans. The additional 10 percent tax for taxable amounts taken before 59½ can apply to both, subject to exceptions you should read in the Form 5329 instructions rather than in a product brochure.

If you want market losses and market gains to show up in the account, a variable annuity at least puts that choice in front of you, at the cost of being able to lose money in the market. If you want a formula that typically does not deduct a down index when you stay put, a fixed indexed annuity is the contract that is built that way, at the cost of the cap. If you want neither the cap nor the insurance wrapper, this comparison is telling you to look outside annuities entirely. The site does not rank those choices.

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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