How do Indexed Annuities Make Money?

The four main ways to make money are with accumulation, guaranteed income, long-term care, or a legacy with death benefit enhancements. TESTING THIS THEME

There are several ways available to make money with fixed indexed annuities. What’s most important to you will depend entirely upon individual goals. 

The four main ways to make money are with accumulation, guaranteed income, long-term care, or a legacy with death benefit enhancements

Each of these can be combined into a single contract or pursued individually for more benefit in one of the three areas. So as not to confuse the issue, let’s look at each of these individually.


Premium paid to fund an indexed annuity can be allocated to several different index options or a fixed rate. Money can be weighted across any mix of these options that the owner chooses and changes can be made to the allocation at each contract anniversary. 

Think about it like mutual fund options and a money market account inside a 401(k).

Fixed Rate

Every fixed indexed annuity is first a fixed annuity. Each contract has the option to allocate a portion of the funds each year to a fixed rate that is guaranteed to grow. 

For those who don’t have faith in the index options to perform in a given year, the fixed rate is a good option to make sure the contract continues to accumulate.

Find out what Ken Fisher thinks about annuities.

Index Options

Each contract has several options that track an external market index for those who wish to pursue more growth potential. 

Well-known indices like the S&P 500, NASDAQ, and Russell 2000 are available as well as several blended indexes that incorporate bond or cash components. 

Most options track the index over a one or two-year period before interest is credited to the account. Longer crediting periods have more growth potential and more risk.

Guaranteed Minimum Surrender Value

This is the contractually guaranteed minimum return for each contract, typically expressed as 87.5% of premiums compounded at 1% to 3% annually. The GMSV factors in maximum surrender charges and market value adjustment. 

With declining surrender charges over time and compounding at the minimum rate, growth is guaranteed over the life of the contract

How Index Annuity Calculators work.

Guaranteed Income:

Fixed indexed annuities are popular because guaranteed retirement income can be achieved without giving up access to the principal balance. This is the most common place to see a fee added to a contract. 

Fees allow for the company to contribute more money to reserves to cover the risk of long-life expectancies. The account value continues to accumulate according to fixed or index options used and decreases only by the fee and annual income. Some contracts are issued without a fee for guaranteed income and I’ll explain the difference below.

Income With a Fee

Typically the highest amount of income available, even more than single premium immediate annuities. Bonuses are often added to increase the income and annual step-ups can increase the guaranteed payout for each year income is deferred. 

Bonuses, annual step-ups, and payout rates are substantially different between companies so a combination of the three is necessary to determine the highest payout. 

For instance, too many people look only at the bonus when another company might have a higher payout rate that produces more income even with no bonus.

Because of the rich income benefits in these contracts, the underlying growth factor is much lower than in other contracts that don’t have a fee. The purpose of using this is to simply maximize guaranteed income payouts.

Income With No Fee

Guaranteed income is lower with no fee to contribute to reserves. Often called participating contracts, account growth can boost the guaranteed income level during the deferral years. Level or increasing payouts are available when payments begin with increasing payments linked to the growth of index options chosen.

Growth potential is much higher than contracts with a fee so along with lower income payments, a larger residual value can be expected. A larger residual value also provides for the potential to change strategies and move the money elsewhere after the surrender term. 

Either way, a no-fee contract is much more flexible and only suitable for someone who doesn’t need to maximize income.

The difference between the two types of guaranteed lifetime income is explained in more detail in a newsletter from March 3, 2023 Guaranteed Income: With or Without Fees?

Long Term Care Enhancements

This will always come as an addition to a guaranteed lifetime income payment. If the annuitant qualifies for long term care by losing two of six activities of daily living, income payments will increase for three to five years, depending on the contract. Some contracts offer a multiple of 1.5 times the income payment and some offer 2 times the payment. 

There are differences between single and joint life income payments as well. The catch with most of these is that the long-term care enhancement won’t activate if the cash value of the account has gone to zero so there may be cases where it’s not available

This is not the best way to plan for long-term care insurance but it is possible to profit in the right situation. Once enhanced payments come to an end, normal guaranteed lifetime income payments resume.

It’s important to note that additional long-term care payments are not qualified for tax-free distributions like many pure long-term care products. In this type of contract, enhanced payments would be taxable just like the regular income stream.

This type of benefit as well as other long-term care options are explained in detail in a newsletter from Jan 11, 2020 Long Term Care and Annuities.

Legacy/Death Benefit:

Additional death benefits for a legacy are most often but not always included with a guaranteed lifetime income rider. If income payments are taken, the death benefit is reduced over time, and not much additional can be expected. 

Some additional death benefits will be paid as a single lump sum while other enhanced payments require five equal annual distributions of the higher amount. Each of the two below can be found either with or without a fee, with the fee products giving a much higher guaranteed death benefit.

Guaranteed annual increase to death benefit

This is a guaranteed fixed rate, compound or simple interest, that accumulates to the death benefit, regardless of account performance. A fixed indexed annuity is guaranteed to not lose money but it’s not guaranteed to grow every year. For those who have a legacy as the primary goal, guaranteed annual growth is a suitable alternative

An example is 5% annual death benefit growth on a fixed indexed annuity. If the index options don’t return more than 5% the owner is assured that the death benefit has increased. For a death benefit, the contract is likely to pay the full account value or death benefit amount, whichever is higher.

Performance-based death benefit

This comes only with participating income riders. A multiple of index growth is compounded to the income benefit value

For example, the account is credited with 8% and the income benefit value is credited with 150% of the growth. The income benefit value therefore increases by 12%. The income benefit value is payable as a death benefit if taken in equal installments over five years. 

The option is to either take the account value in one lump sum or the death benefit value if paid over five years. If performance is adequate this can create a very healthy legacy for the assets in the contract.

Several Ways to Make Money

Between accumulation, guaranteed lifetime income, long-term care enhancements, and additional death benefit options, there are plenty of ways to make money with fixed indexed annuities. 

Many contracts are promoted as being able to offer all of these. Although contract language might indicate that is true, the reality of the situation is that each will be reduced to make room for the others so you’ll get a little bit of everything but not a lot of any single benefit. 

To maximize benefit in the area that is most important to you, focus on the contracts that are built to do one thing really well. If you want to learn more check out the

To maximize benefit in the area that is most important to you, focus on the contracts that are built to do one thing really well.

If you want to learn more about Index annuities check out my Fixed Indexed Annuity Guide.

Bryan J Anderson

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