The Fixed Indexed
Annuity Guide

I put together this fixed indexed annuity guide for you, so you can learn everything you need before you get an annuity. TESTING THIS THEME

The Fixed Indexed-Annuity Guide Featured Image

Contract growth can be achieved through either a fixed rate of interest or a market linked index. Various market indexes, most commonly the S&P 500, are used to create greater earnings potential without risk to the initial investment. Additional riders or benefits can be added to the contract that offer guaranteed income, enhanced death benefit, or long-term care coverage. I put together this fixed indexed annuity guide for you, so you can learn everything you need before you get an annuity.

Key takeaways: How does a Fixed Indexed Annuity Work?

First You Must Understand the Basics of a Fixed Annuity

  • The insurance company invests premium mostly in bonds and treasury instruments (100% of your money is backed by safe assets)
  • This portfolio produces a gross yield and the insurance company takes a spread or portion of the yield to cover expenses and produce profits
  • The remaining interest is credited to the annuity as a guaranteed yield
  • Rates are typically a bit higher than comparable CDs or Bonds

Fixed Indexed Annuity

  • The contract can be credited with a fixed interest rate, or…
  • The fixed interest will be used to buy an option in a market index
  • If the index is positive, earnings from the option are credited to the annuity as earnings
  • If the index is negative, interest earnings are lost
  • The principal is never at risk so the contract will not lose money
  • Several index options are available within each contract and a blended allocation of indices can be used to diversify opportunities for accumulation

Fixed Indexed Annuity Video Guide

If you prefer to watch a video, I’ve made one that covers this article.

What’s an Indexed Annuity?

A fixed indexed annuity is a type of annuity that’s a contract between an individual and an insurance company. Under this contract, the individual makes a lump-sum payment via check or IRA transfer to fund the account. The insurance company, in return, invests the money in a safe portfolio mostly composed of high-grade bonds and government treasuries. The difference with indexed annuities is that the principle is protected and growth potential is tied to the performance of a market index, such as the S&P 500.

Indexed annuities strike a unique balance between growth potential and no risk. They offer the opportunity for potentially higher gains compared to fixed annuities due to their link with market indices. At the same time, they protect the individual against the risk of market downturns because the contract owner will never lose money.

Because of the downside protection, the performance of fixed indexed annuities is limited due to features such as cap rates, participation rates, and margins. These factors determine how much of the index’s gain will be credited to the annuity on an annual basis.

The evolution of indexed annuities has seen the development of more complex indexing strategies with the aim of maximizing returns while maintaining a safety net against market losses.

Today, indexed annuities fit as a part of a balanced financial plan. They occupy the middle ground between aggressive growth investments and conservative fixed-income options. Those who enjoy the protection component but want growth closer to market yields find the perfect balance with fixed indexed annuities.

Bryan Riding Horses

How Fixed Indexed Annuities Work:

  1. You invest money into an indexed annuity with an insurance company.
  2. The insurance company invests your money into a pool of safe assets. Interest earnings from those investments are used to purchase an option on a market index
  3. After one year, if the index is positive, the insurance company credits your account with a portion of the index’s gains, up to a certain limit.
  4. Several different index options are available in every contract, are chosen upon at issue, and can be changed at each contract anniversary.
  5. Each contract allows a portion of the money to be withdrawn every year without penalty. Distributions from the contract in excess of this amount will face a

Important parts of Fixed Index Annuities

  • Surrender Penalties
  • Market Value Adjustments
  • Guaranteed Minimum Surrender Value
  • Contract Maturity
  • Additional Riders and Benefits

Surrender Penalties

A basic fixed indexed annuity has no fees. 100% of the money you dedicate to the contract goes to work day one. However the insurance company has costs associated with issuing the contract that include both administrative operations and agent commissions. Should you decide to surrender the annuity before the end of the surrender term, the insurance company charges a fee to recoup the upfront costs. It’s a necessary component of a financial contract with no sales load or ongoing contract fees.

Surrender terms for fixed indexed annuities range from three to 16 years but most contracts issued have ten year terms. The surrender penalty declines on each contract anniversary, eventually to zero at the end of the term.

Market Value Adjustments

Although not advisable, many contracts are surrendered early. This means the insurance company has to liquidate a bond position in a potentially unfavorable environment, creating an additional positive or negative adjustment to the surrender value. In comparison to benchmark rates when the contract is purchased, at time of surrender, higher benchmark rates will create a negative market value adjustment and lower benchmark rates will create a positive market value adjustment.

It is possible to have a market value adjustment that completely negates surrender fees and may even produce a small profit for the contract owner. Benchmark rates are listed in each contract, so this is an objective calculation that is not left to the insurance company’s discretion.

Guaranteed Minimum Surrender Value

Individual states regulate annuity products and most regulations are uniform across all 50 states, including the guaranteed minimum surrender value. High surrender fees in the early years of a contract, along with the possibility of a negative market value adjustment cause a substantial financial burden for an owner surrendering a contract early.

As such, each contract lists a maximum limit on the combination of surrender charges and negative market value adjustments, defined as the guaranteed minimum surrender value. This is typically described in the contract as 87.5% of premiums paid compounding at 1%-3% annually. Each company sets annually the compounding rate in that range and once stated is good for the life of the contract.

Contract Maturity

Contrary to popular belief, the contract does not end at the expiration of the surrender term. At the end of the surrender term, the contract continues simply free of all surrender charges and market value adjustments.

The maturity date is when the contract ends, which is the annuitant’s age 95-120, depending on the issuing company’s policy. At maturity, the contract must be surrendered or taken as a series of income payments. This is what makes the contract an annuity.

Additional Riders and Benefits – Where Fees are Found

Various optional riders can be added to fixed indexed annuities that provide one or more additional retirement benefits. Each contract may have a single additional option or a combination of the below. All are mostly responsible for any fee you might see on a fixed indexed annuity.

Guaranteed Lifetime Income

This is the most common benefit and one of the main reasons why people buy fixed indexed annuities. Regardless of account performance, you can receive a guaranteed income payout for life, either starting immediately or deferred for a number of years.

Each year of deferral increases the payout you can expect so it can be purchased well ahead of retirement. Contracts are available with or without fees for guaranteed lifetime income, allowing the purchaser to customize the retirement income plan. 

Long Term Care Enhancements

Usually available with a guaranteed lifetime income rider, the long term care enhancement offers an increased income payout if you need long term care assistance. Enhanced payouts are typically available for three to five years and when completed, income payments revert to the initial guaranteed income amount.

Guaranteed Death Benefit

With all fixed-indexed annuities, the death benefit equals the accumulated value of the contract. An enhanced death benefit offers a guaranteed annual increase to the death benefit each year, regardless of account performance.

Return of Premium

This rider gives the contract owner the option to exit the contract early without paying surrender penalties. In most cases, the ROP is available after the fourth contract year.

Enhanced Performance

Each contract has a list of index options available for allocation of the premium. In addition, many contracts offer much higher growth potential on each of the index options, for an additional fee. The choice to use enhanced growth potential is left to the contract owner and can be changed at each contract anniversary.

Learn how to buy an annuity.

How do insurance companies cover the risk involved?

Insurance companies carry no risks directly associated with the issuance of fixed indexed annuities. Premium from these contracts is invested and held in the insurance company’s general account so the safety of fixed indexed annuities is on par with the insurance company as a whole.

 Typically, 90% or more of an insurance company’s assets are well diversified and stable holdings of high-grade bonds and US Treasuries. Every annuity is backed by these assets, dollar for dollar. In addition, each company holds significant reserves that insulate the company from the ups and downs of a normal business cycle.

Fixed indexed annuities are backed the same as any other general insurance obligation. Each insurance company has partnerships with investment banks to manage the options used in each annuity. Since the insurance company only uses interest earned on assets to purchase these options, the principal investment is never at risk and is just as safe as any other insured asset.

Trees Growing

How a Fixed Indexed Annuity Grows

When you invest in a fixed indexed annuity, the insurance company uses your premium to buy a portfolio of bonds and other safe instruments. This returns a yield to the company. With a fixed annuity, you would be credited with the interest earned.

However, with a fixed indexed annuity, the company instead uses the earned interest to purchase an option in a market index. If the market index increases during the term, then the option makes money and this gain is credited to your account. If the index declines, the interest invested in the option is lost, but your principal balance is never at risk.

The worst-case scenario is that you’ll earn 0% for a term, but you have the opportunity to see yields in the double digits. The real benefit is that once interest is credited to your account, it can never be lost.

Interest Crediting 

Addition of interest or gains to your account balance. This happens at the end of each crediting term which is mostly on each contract anniversary. Several different crediting terms are available with the most popular being each year, with other optional terms in a range of two to ten years, depending on each contract.


“Yield” refers to the earnings or return on an investment. It’s the income returned on an investment, which includes interest or dividends received from holding a particular security.

Protecting assets comes at the cost of some growth. Reasonable people understand this but still want to get the best deal.

Many contracts are sold with the idea that you can earn as much as, or more than, long-term stock market averages. While this would be nice – and is possible – it is not something you should expect. If an agent is giving you overblown promises, then you need to look at the other questions more closely.

In the context of index annuities, if the market index increases during the term, then the option makes money and this gain is credited to your account as yield. If the index declines, the interest invested in the option is lost, but your principal balance is never at risk.

The worst-case scenario is that you’ll earn 0% for a term, but you have the opportunity to see yields in the double digits. The real benefit is that once interest is credited to your account, it can never be lost.

Yields will vary depending on type of contract and you should consider four important things:

  1. Current Fixed Interest Rate: Each fixed indexed annuity is first a fixed annuity with a fixed rate of interest available. Any percentage of the total funds can be allocated to a guaranteed fixed rate option, one year at a time.
  2. Cap Rate: States the maximum amount of interest that will be credited to the account if index performance is positive.
  3. Participation rate: States the percentage of positive index performance that will be credited to the account. There is no limit to interest earnings with a participation rate.
  4. Margins: A rate of interest deducted from positive index performance before a credit is made to the account. There is no limit to interest earnings with a margin.

All above options have advantages over the others, depending on the movements of the overall market. If the market is down, the Fixed Rate is the best. If the market is up slightly, the Cap Rate is the best option. When the market is up substantially, the Participation Rate or Margin would be the best option.

How does an Annuity Company Make Money?

When you invest in an annuity, the insurance company uses your premium to buy a portfolio of bonds and other safe instruments. This returns a yield to the company. With a fixed annuity, you would be credited with the interest earned. However, with a fixed index annuity, the company instead purchases an option in a market index. If the market index increases during the term, then the option makes money, which is how the company generates a return on your investment.

The document also mentions that some annuities may have hidden fees. When fees are added, they can either decrease performance or lock you into a contract longer than you want. These fees are another way that annuity companies can make money.

It’s important to note that different contracts may have different terms and conditions, and this can significantly impact the potential returns from an index annuity. Therefore, it’s crucial to fully understand the contract and how it fits into your overall financial strategy before investing.

Read more about how indexed annuities make money.


Are indexed annuities Safe in a Market Crash?

Substantial diversity across a variety of safe assets in addition to hefty reserves make insurance companies extremely stable. The funds that back an annuity are not invested directly in the market so would not be exposed to a market crash. Since fixed indexed annuities only use interest earnings to buy market options, the principal is never at risk. Only the interest earnings may be lost which represents an opportunity cost as the biggest risk.

Index Annuity Calculators

Index annuity calculators showing you what to expect in the future aren’t reliable.

There are far too many variables at play in a fixed indexed annuity to make a calculator that can capture it all.

Pros and Cons of Fixed Indexed Annuities

Each of the individual components of a fixed indexed annuity can be seen as a pro or a con, depending on your expectations and goals. Let’s look at each of the major components and the positive vs. negative attributes of each.

Pros of Fixed Indexed Annuities

  • You will never lose money.

  • Credited interest is guaranteed against loss.

  • Yields that are far greater than any safe asset.

  • Protection from interest rate risk.

  • Many indices to choose from.

Cons of Fixed Indexed Annuities

  • The cost for safety is limited growth.

  • Most interest is credited once per year.

  • Unable to micro manage every aspect.

  • Annual withdrawals.

  • Variety of available options is confusing.

Learn more in our Index Annuity Pros and Cons article.


Pro – You will never lose money. The insurance company invests your premium in a portfolio of safe investments and backs it up even further with substantial company reserves giving your money the protection and guarantee that you need.

Con – This isn’t good enough for some people. The cost for safety is limited growth and there are those that don’t mind risk in return for unlimited growth potential.

Earnings Guaranteed

Pro – Once interest is credited to your account it is also guaranteed against loss. Protected principal and earnings is a powerful benefit that pays off when markets are volatile.

Con – Most interest is credited once per year, although there are options for two and three year crediting as well. This means your earnings potential depends on how the market finishes on a single day. A significant drop in the market at the end of your crediting period can wipe out expected gains. That can be positive as well but it’s important to not place all your expectations on a single year.

Caps, Participation Rates and Spreads

Pro – You get a risk-free option to track performance of a stock market index. Option costs dictate how much of that gain you receive. Specifics go deeper but the benefit is that you will experience yields that are far greater than any safe asset.

Con – Again, it all speaks to expectations. If you think you can buy your own options and do better then go for it. However, an individual strategy using options is very risky and requires a highly specialized skill set.

Surrender Periods

Pro – This is all relative to other safe money options. CDs and Bonds have some long commitments as well but the annuity comes with access to funds and protection from interest rate risk.

Con – Many supposed experts tell you not to lock money up for extended periods of time. It all depends on your plans for the money so if the annual free withdrawal is not enough to meet your needs then an annuity is not right for you.

Indices and Crediting Methods

Pro – Considering the entire annuity market, you have an overabundance of indices to choose from and crediting methods to use so no matter what your preference, there is an option available that will work for you.

Con – The variety of available options is confusing for most people. It may then be more appropriate for anyone like that to stick with commonly used indices like the S&P 500, Dow Jones or NASDAQ.

Which are the Most Common Complaints About Indexed Annuities?

This is why people don’t buy fixed indexed annuities

  • Very volatile.
  • You have to wait for interest rates to rise.
  • Too much info.
  • Life gets to busy to look into all the details.
  • You have to trust the companies offering annuities.
  • Can’t agree on a plan with your spouse.
  • Other investments are more alluring.

1) Market volatility

Lots of people have a specific portfolio value goal and until the benchmark is met, no changes will be made. This is especially true these days since October 2018 was the worst month for the S&P 500 in seven years! It’s hard to look at a decreased portfolio and sell securities when down in value. Don’t forget that the stock market is still at a very high level and the last two years have produced excellent returns. A slight draw-down after such aggressive growth is quite normal so recent turmoil shouldn’t cause any great concern. The question is always where will it go from here? The market may resume its climb in the next couple months or it may drop even further. By all means chase the growth you want but don’t take on unnecessary risk that may negatively affect your retirement.

2) Waiting for interest rates to rise

I’ve been hearing this since I started my career 16 years ago. But rates steadily fell and only recently rose slightly. The truth behind rate movements is that it takes a long time to see a substantial increase. Delaying retirement decisions based on interest rates is not rational. Rather, interest rates should help you decide what kind of strategy is more appropriate. In today’s market the value is found in short-term products and this means that traditional products and advice are fundamentally flawed. Most of the arguments I receive come from other advisors and it shows that most don’t do anything but regurgitate an institutional sales pitch. Stick with advice relevant to current conditions that give you the opportunity to make changes over time.

3) Information overload

Everyone experiences this when shopping for annuities. Opinions are diverse and most advisors try to justify their own biases. Misrepresentations and lack of experience is the source of much of the information you will receive. The science of asset distribution is very new so new products don’t always fit with the old way of thinking. The numbers never lie and sound strategies are backed by fundamentals. This is a hard barrier for many to cross so don’t worry if you need a little extra time to sort things out.

4) Life is hectic

Pre-retirement can be a busy time. Moving to a new location, kids in college or grandkids visiting are just a few of the things that make many feel as though there’s just too much going on to concentrate on finances. I meet a lot of people who go into retirement not knowing what they need from a portfolio. If so, the decision of whether to protect money or let it continue riding the market hasn’t been quantified. Protecting money and putting things in place for retirement doesn’t always mean buying an annuity. Interim steps can be taken so you don’t risk more than needed and allow you to save the big commitment until you have more time to focus.

5) You don’t know what you don’t know

All sales presentations are made to sound great. The majority of people start searching for answers after they see the first pitch. You don’t specialize in this area so it can be difficult to know if you are really making the best move. Asking for a comparison to all approaches is a good first step to solving this problem but that can also be hard when you don’t know what questions to ask. Take a step back and look at all safe money options, which are not as diverse as you think. Compare based on yield, time horizon and liquidity to find the one that offers the benefits and flexibility that you need.

6) You want to work with someone local

It takes a big leap of faith to make major financial changes in retirement no matter where the advisor is located. My goal is that you get the best plan for your needs and if you can get that locally then go for it. But it’s no reason to accept a less than ideal product or plan. Using technology to your advantage can open you up to more products, better strategies and a level of convenience that no conference room can provide. In the end it’s up to you but you need to understand that I’m still in business because I often beat the competition.

7) You and your spouse can’t agree on a plan

Communication is the key to success. You may like one advisor and plan but your spouse likes another. Different plans come with different benefits and if you can’t agree on which is better then you probably don’t have the best deal. This offers you an excellent opportunity to define every goal you have. In all likelihood you are both right, you just don’t have all the information and the best option in front of you yet.

8) Alternative investments seem more exciting

Earlier this year I had an interesting series of meetings. One particular gentleman came to me with a very specific goal of retirement income. He had seen one proposal and liked it but wanted to know if I had something better. I showed him a variation of the Flex Strategy that fit his situation and as usual my numbers were quite a bit better than what he had already seen. Thinking I had a new client, we spoke again just a few days later. He thanked me for my time and said he had decided that instead of buying an annuity he planned to invest the money in a family mining business in South America. Wow… talk about opposite ends of the spectrum! If protecting assets is not your primary reason to consider annuities then you should probably save the effort and spend your time analyzing different speculative investments.

9) Trust

People run into this roadblock all the time and it relates to all of the above in some way. It’s the same reason why it took my wife more than a year to decide what kind of new car she wanted. Salesmen in every industry are skilled at convincing you his or her product is the best option, even though it may not be. In the financial services industry there’s a difference in the type of advice you receive. One is based on the suitability standard which means a recommendation needs to be reasonable for your situation. The other is the fiduciary standard which says the recommendation has to be in your best interests. That doesn’t make it any easier to decide who is telling the truth. I see as much fault in many fiduciary plans as I see in plans based on the suitability standard. The only answer to this is learning to trust yourself. You need to analyze the options in front of you and choose the strategy that fits your best interests. I’ll do my best to justify any recommendations and disclose all contingencies but in the end it is up to you to decide.

Find out why people don’t buy annuities.

Elder couple sitting by a lake


A final Word About the Fixed Indexed Annuity Guide

I hope this Index Annuity Guide serves as a comprehensive guide to understanding fixed index annuities, their benefits, potential drawbacks, and how they can fit into an individual’s retirement planning strategy. It explains that fixed index annuities are a type of investment product offered by insurance companies that provide the potential for higher yields compared to other safe money options, while also protecting the principal balance from loss.

The guide presents fixed index annuities as a potentially beneficial component of a retirement plan, particularly for those seeking safety, potential growth, and income guarantees. However, it emphasizes the importance of understanding the contract and how it fits into one’s overall financial strategy before investing.

At Annuity Straight Talk, our mission has always been to equip individuals with the necessary information to make informed decisions. We have observed a significant knowledge gap among consumers, often confused by conflicting advice from different advisors. While annuities play a crucial role in an optimal retirement plan, it is essential to understand how and when to incorporate them within the context of an individual’s situation.

We encourage you to conduct thorough research and gather information, but when you are ready to develop an optimal plan tailored to your specific circumstances, we are here to assist you. We understand that an annuity may not be suitable for everyone, depending on factors such as age and assets. We prioritize providing honest guidance and will inform you if we cannot offer suitable solutions.

– Bryan J. Anderson

Bryan J Anderson

Interested in taking the next step? Simply call to discuss if Index Annuities are suitable for your situation.