A fixed indexed annuity (FIA) is an insurance contract that protects your principal and credits interest based on how a market index performs. You never invest in the market directly. The interest you are credited is not the index's return: it is the index's return after the contract's limits are applied, and it is never below zero for the period. Those limits, called the cap, the participation rate and the spread, decide most of what an FIA actually earns. You can see how this product fits into a plan on our fixed indexed annuity page.
The short version
- Floor: the lowest interest credited in a period, usually 0%. A down year for the index does not reduce your account value from index losses.
- Cap: the most the contract can credit in a period, however well the index does.
- Participation rate: the share of the index's gain that counts toward your interest.
- Spread: a set percentage subtracted from the index gain before interest is credited.
- Surrender charge: a fee for taking money out early, during the surrender period.
Where an FIA sits among annuities
The SEC's investor education site groups annuities into fixed, fixed indexed, registered index-linked and variable. A fixed annuity earns at least a stated minimum rate. A fixed indexed annuity ties its interest to an index and generally has no risk of losing principal, other than surrender charges if money is taken out during the surrender period. A registered index-linked annuity, by contrast, can lose money when the index performs poorly. An FIA's guarantees rest on the financial strength and claims-paying ability of the insurance company that issues it.
How the interest is worked out
Each crediting period (often one year), the insurer looks at how the index changed and applies the contract's limits. Two examples, using the figures the SEC uses in its bulletin:
Participation rate. With an 80% participation rate and a 9% index gain, the credited interest is 7.2% (9% x 80%).
Cap. With a 7% cap and a 12% index gain, only 7% is credited.
Floor. If the index falls 5% and the floor is 0%, the credited interest is 0%. The account does not grow that period, and it does not shrink from the index decline.
Contracts can combine these limits, so reading the specific terms matters more than the headline index.
What can change over time
The SEC notes that indexed annuity contracts commonly let the insurer change features such as the cap, participation rate or spread periodically, and that those changes can reduce what you earn. So the rates quoted at purchase are not necessarily the rates in year four. A contract's renewal terms are worth asking about before buying.
The trade-off
An FIA is built for people who want protection from index losses and are willing to give up part of the upside and some flexibility to get it.
- What you get: principal protection from index declines, and credited interest that is locked in once it is added.
- What you give up: the full gain in strong years (because of the cap, participation rate or spread), and easy access to your money during the surrender period, which the SEC says typically runs six to ten years or longer.
The SEC describes indexed annuities as complex products and advises reading the contract carefully before deciding. The NAIC's buyer's guide adds that regulators expect annuity recommendations to be in the buyer's best interest.
Questions worth asking before buying
- What is the cap, participation rate or spread, and how long is each one set for?
- How long is the surrender period, and what is the charge each year?
- How much can be withdrawn each year without a charge?
- Which index and which crediting method does the contract use?
- How is the insurance company's financial strength rated?
FAQ
Can a fixed indexed annuity lose money?
Not from index declines. The floor is usually 0%. Money taken out during the surrender period can cost a surrender charge, which can reduce what you receive.
Is my money invested in the stock market?
No. The contract's interest is linked to an index's performance, but the money is not invested in the index.
Why does my credited interest differ from the index return?
Because the cap, participation rate or spread is applied first.
Is an FIA right for everyone?
No. Whether it fits depends on a person's timeline, need for access to cash and other savings. A private review is the way to find out.
Talk it through
If you would like to see how these terms work on a specific contract, Sunny Financial Group offers a private review. 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 Office of Investor Education and Advocacy, "Updated Investor Bulletin: Indexed Annuities" (investor.gov)
- SEC, Investor.gov, "Annuities" product comparison (investor.gov)
- NAIC, Buyer's Guide for Deferred Annuities (naic.org)