A fixed indexed annuity, a bank certificate of deposit (CD) and a market investment such as a stock fund each protect money in a different way. A CD is a bank deposit backed by federal deposit insurance up to a limit. A fixed indexed annuity is an insurance contract whose guarantees rest on the issuing insurance company. A market investment can gain or lose value with the market. The right comparison is not which one is best, but which trade-offs a person is comfortable with. You can read more on our fixed indexed annuity page.
The comparison at a glance
| Fixed indexed annuity | Bank CD | Market investment | |
|---|---|---|---|
| What it is | Insurance contract | Bank deposit | Ownership in stocks, bonds or funds |
| Loss from market declines | Generally none from index declines | None | Possible |
| Growth | Interest tied to an index, limited by a cap, participation rate or spread | Fixed rate for the term | Varies with the market, no set limit |
| Who stands behind it | The issuing insurance company | A bank, with federal deposit insurance up to the limit | No guarantee of return |
| Access to money | Surrender charges during the surrender period | Early withdrawal penalty before maturity | Generally available, value may be lower |
Safety: three different kinds of backing
A CD is a deposit at a bank. The FDIC insures deposits at insured banks up to $250,000 per depositor, per insured bank, per ownership category. That insurance is a federal program, and it is automatic at an insured bank.
A fixed indexed annuity is not a bank product and is not FDIC insured. The SEC notes that an insurance company's obligations under an annuity contract depend on its financial strength and claims-paying ability. State rules also provide a backstop for annuity owners through state guaranty associations, with limits that vary by state, so it is worth looking up the limit that applies where you live.
A market investment carries no guarantee. Value rises and falls with the market, and an investor can lose some or all of the amount invested.
Growth: what each one can earn
A CD pays a fixed rate for a set term, so the return is known up front. It does not rise if rates climb after the CD is opened.
A fixed indexed annuity credits interest linked to an index, after the cap, participation rate or spread is applied. In a year the index falls, the floor is usually 0%. The SEC's comparison page says a fixed indexed annuity generally has no risk of loss other than a surrender charge, with ongoing costs reflected in the limits on how much you can earn. Our guide to how a fixed indexed annuity works walks through caps and floors with worked numbers.
A market investment has no cap, which means more upside in strong years and the possibility of losses in weak ones.
Access: what it costs to take money out early
- CD: most CDs charge a penalty for early withdrawal, often a set number of months of interest. Terms vary by bank, so the account agreement is the place to check.
- Fixed indexed annuity: the SEC says a surrender period typically lasts six to ten years or longer, and taking money out during it can trigger a surrender charge. Many contracts allow some penalty-free withdrawals each year, so ask what the allowance is.
- Market investment: money is usually available when needed, but the amount received depends on the market that day.
How people think about the choice
These products are often used for different jobs rather than as substitutes:
- Money needed within a few years, where certainty and access matter most, tends to point toward bank deposits.
- Money meant to grow over a long period, where ups and downs are acceptable, tends to point toward market investments.
- Money a person wants protected from market declines but wants a chance to earn more than a fixed rate, and does not expect to need for the surrender period, is where a fixed indexed annuity is usually considered.
Whether any of these fits depends on a person's timeline, need for access to cash and other savings. A private review is the way to find out.
Questions worth asking before choosing
- When might I need this money, and what would early access cost?
- Where does the safety come from: a bank and federal insurance, or an insurance company?
- What are the caps, participation rate or spread, and can they change?
- What is the surrender period and the yearly penalty-free withdrawal?
- How does the amount I am considering compare with the protection limits that apply?
FAQ
Is a fixed indexed annuity safer than a CD?
They are protected differently. A CD has federal deposit insurance up to $250,000 at an insured bank. An annuity relies on the insurer's financial strength, with state guaranty association backup that varies by state.
Can I lose money in a fixed indexed annuity?
Not from index declines, since the floor is usually 0%. Taking money out during the surrender period can cost a surrender charge.
Does a fixed indexed annuity earn more than a CD?
Not necessarily. A CD's rate is known up front, while an FIA's interest depends on the index and the contract's limits, and can be 0% in some years.
Which is right for me?
It depends on timeline, access needs and other savings. A private review can help sort it out.
Talk it through
Sunny Financial Group offers a private review of how these options compare for a specific situation. See our fixed indexed annuity page.
Fixed indexed annuities are insurance products issued by licensed carriers. They are not bank products, securities, or direct market investments. Guarantees are backed solely by the financial strength and claims-paying ability of the issuing insurance company and are not guaranteed by any government agency. Product features vary by carrier and state.
Sources
- SEC Investor.gov, "Annuities" (investor.gov)
- SEC Office of Investor Education and Advocacy, "Updated Investor Bulletin: Indexed Annuities" (investor.gov)
- FDIC, deposit insurance and certificate of deposit guidance (fdic.gov)
- NAIC, Buyer's Guide for Deferred Annuities (naic.org)