A fixed indexed annuity is a bundle of tradeoffs. Listing them is not a suggestion to buy or to avoid the product. The same feature is an advantage for one person and a cost for another. Every item below is tied to a regulator’s description, and the items that would require a made-up average have been left out on purpose.

What people are usually trying to get

If the index falls during a crediting term and you do not withdraw, the NAIC Buyer’s Guide says the credit is typically zero rather than a negative percentage. Interest that has already been credited is usually locked, so a later down term does not claw it back. For someone who has watched a market account fall and who can leave the contract alone, that combination is the feature they came for. It is not a guarantee of growth. Zero is a real possible result, and a series of zeros does not keep up with rising prices.

Tax deferral on a nonqualified contract delays tax on earnings. When you withdraw, the earnings are generally ordinary income. Deferral can help if you would otherwise pay tax on interest every year and if you can wait. It usually does not add anything if the money is already in an IRA or a 401(k). FINRA says that plainly. Deferral also sits next to the additional 10 percent tax that may apply to the taxable portion before age 59½, unless an exception applies. Topic 410 and Form 5329 are the references. The exception for separation from service is not something to copy onto a nonqualified annuity.

An optional income rider can continue lifetime payments after the account value is zero. The NAIC guide separates that promise from cash surrender value. It is a way to transfer the risk of a long life to an insurer, for a charge the guide does not standardize. If you do not need that promise, the charge is not a pro.

What you give up

You do not receive the index return. You do not own the stocks, and dividends are usually excluded. The SEC’s illustration — a 7 percent total return of which 2.5 percent is dividends, so many formulas would use 4.5 percent — is the dividend gap alone, before a cap. A cap makes the gap larger in a strong year. The SEC’s cap illustration credits 7 percent when the index rises 12 percent. FINRA uses that same pair as a hypothetical. A participation rate or a spread can cut the credit instead, or as well. The insurer may change those limits later. A good first-year cap is not a pro you can count for the life of the contract unless the contract guarantees it.

You give up easy access. The SEC says surrender periods are often six to ten years or longer. The charge usually declines each year, and you can still get back less than you paid. A market-value adjustment, on contracts that have one, can push the payout up or down. A replacement can start the surrender clock over even when a 1035 exchange avoids current income tax. Tax-free, in Revenue Ruling 2007-24’s sense, requires an insurer-to-insurer exchange. If you receive the check, it is not a 1035 exchange, and you may still have paid a surrender charge to get that check.

You take the insurer’s credit risk. The contract is not FDIC or SIPC insurance. Guaranty associations may pay up to a limit after an insolvency. NOLHGA says most provide at least $250,000 in present value of annuity benefits, and limits vary. New York describes up to $500,000 for a New York resident’s fixed benefits. Those ceilings are not a pro in the sense of “coverage encourages a larger purchase.” NOLHGA and the state departments discuss them as backstops, not as a reason to buy.

Things that are neither, until you read the form

A bonus can be a larger starting value or a number that vanishes if you leave. This site will not call it a pro without the vesting and surrender language. A free-withdrawal provision, which the NAIC says some contracts offer, for example on 10 percent or less and usually up to 10 percent, is helpful only if it is in your contract and only if the amount covers what you might need. An indexed contract can be simpler than a variable annuity because you are not picking funds, and it can be harder to understand than a CD because the credit is a formula. Complexity is a con if you will not read the term sheet. It is neutral if you will.

A minimum nonforfeiture rate is not a pro you should add to the cap. FINRA described a usual 1 percent to 3 percent on at least 87.5 percent of premium. Model 805 can set the formula’s floor at 0.15 percent before an extra equity-index reduction, and state law differs. Treat that as a legal floor on certain values, not as expected interest.

How to use the list

If the pros you care about require you to stay for the whole surrender period, and the cons you care about are about access in year three, the contract does not match the job. If the only pro you care about is “beating the market,” the product is the wrong tool, because the cap exists to stop that. More on the decision, still without a recommendation, is on is one right 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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