A fixed indexed annuity — sometimes called an equity-indexed annuity or an FIA — is a fixed deferred annuity issued by an insurance company. During the years you leave money in the contract, the company credits interest that comes from a formula, and the formula uses the change in a published index.

It is a contract, not a brokerage account

You pay a premium, either as one amount or as a series of payments, depending on the contract. In return, the insurer promises the benefits written in that contract. The SEC’s July 31, 2020 investor bulletin describes an indexed annuity this way: the company credits a return based on changes in a securities index, such as a stock index. You are not buying shares of the companies in the index. You do not receive the dividends those companies pay, because the formula usually ignores dividends.

That last point is easy to miss when someone compares the contract with “the market.” The SEC used an illustration, not a claim about a typical year: if a total return were 7 percent and 2.5 percent of that were dividends, many indexed annuities would use 4.5 percent as the index change. That illustration is the SEC’s arithmetic. It is not a prediction of what an index, or a contract, will credit.

The contract will name the index. Common examples in marketing include stock indexes whose names are trademarks of their owners. This site is not affiliated with those index providers. The index is only a measuring stick. A change in the measuring stick, after the contract’s limits are applied, becomes an interest credit — or, when the index is down and you do not withdraw, often a credit of zero for that term.

Deferred means you are not taking income yet

A deferred annuity has an accumulation period. You are not required, by the mere fact that it is deferred, to turn the account into a monthly paycheck on a set date. The SEC bulletin describes the later choice in general terms: after the accumulation period the company will make periodic payments under the contract unless you choose to take the contract value in a lump sum. The dates, the payment options, and any reduction for taking the lump sum are in the contract. This site does not describe a standard payout rate, because there isn’t one that applies to every form.

People sometimes use “fixed annuity” to mean only a contract that credits a rate the insurer declares in advance, with no index. A fixed indexed annuity is still on the fixed side of the insurance product line in an important sense: the indexed interest formula is not a separate account of mutual funds. A variable annuity is different. So is a registered index-linked annuity, often called a buffer annuity or RILA. The SEC bulletin points out that not every product with “index” in the name is outside the securities laws. Some indexed annuities are securities, and those can expose you to investment loss, including by applying a negative index change to the contract value. A fixed indexed annuity, as consumer guides usually use that name, is the contract that typically does not deduct a down index from your value if you stay in and do not withdraw. Do not assume a brochure that says “index-linked” is that product. Read whether negative index performance can reduce the account. If it can, you are not looking at the contract this paragraph just described.

What “fixed” does not promise

Fixed does not mean the interest rate is a number you can look up once and keep forever. The insurer generally may change caps, participation rates, or spreads for later terms. FINRA said that directly in its July 14, 2022 article. Fixed also does not mean you cannot receive less than you paid. If you cancel during the surrender-charge period, the charge can reduce the value below the premium. The SEC and FINRA both make that point. A longer explanation is on the surrender charges page.

Fixed does not mean the contract is a bank deposit. FINRA’s annuities overview says annuities are not insured by the FDIC or SIPC. If the insurer fails, a state life and health insurance guaranty association may provide coverage up to a limit. That limit is not a reason to buy a larger contract, and it is not the same as FDIC insurance. See risks.

The minimum value is a different number from the index credit

Contracts also refer to a minimum guaranteed value. FINRA’s 2022 article described a minimum guaranteed interest rate, usually between 1 percent and 3 percent, on at least 87.5 percent of the premium. Read that as FINRA’s description of a usual range at the time it wrote, not as a statute that promises you 1 percent to 3 percent. NAIC Model 805, the standard nonforfeiture law for individual deferred annuities, was amended in the fall of 2020 so the formula’s floor can be as low as 0.15 percent, and the model allows a further reduction while the contract provides substantive participation in an equity-index benefit. States adopt their own versions. The nonforfeiture calculation is a floor on certain contract values. It is not the index credit, and it is not a forecast of what you will earn when the index rises.

Parties you will see named

The NAIC buyer’s guide discusses the people a deferred annuity contract names. The owner has the rights the contract gives an owner, including the right to take withdrawals, subject to charges. The annuitant is the measuring life if the contract later pays income based on a life. The beneficiary is the person or entity named to receive a death benefit if the contract provides one. Those roles can be the same person or different people. Who is allowed to change a beneficiary, and what a death benefit actually pays, is contract language, not a national formula. New York’s insurance department says, on its annuity products page, that a death benefit is not a surrender. That statement is about New York. Do not assume every state treats a death claim the same way for surrender-charge purposes.

What this page will not tell you

It will not tell you whether to buy one, which insurer to use, or what cap you should expect. Those answers are not in a general article. Use how they work for the crediting steps, questions to ask before a meeting, and is one right for you for the decision factors that are not a recommendation.

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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