Fixed Indexed Annuities

A fixed indexed annuity is a tax-deferred, long-term savings vehicle with characteristics of both fixed and variable annuities. The interest rates are tied to a market index, such as the S&P 500. Fixed indexed annuities can help provide an income stream to people in retirement.

Rachel Christian, writer and researcher for RetireGuide
  • Written by
    Rachel Christian

    Rachel Christian

    Financial Writer and Certified Educator in Personal Finance

    Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics. Rachel is a member of the Association for Financial Counseling & Planning Education.

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    Matt Mauney
    Matt Mauney, Senior Editor for RetireGuide

    Matt Mauney

    Financial Editor

    Matt Mauney is an award-winning journalist, editor, writer and content strategist with more than 15 years of professional experience working for nationally recognized newspapers and digital brands. He has contributed content for,, The Hill and the American Cancer Society, and he was part of the Orlando Sentinel digital staff that was named a Pulitzer Prize finalist in 2017.

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    Toby Walters, CFA

    Toby Walters, CFA®

    Chartered Financial Analyst and Paraplanner

    Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.

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  • Published: May 21, 2020
  • Updated: June 24, 2023
  • 5 min read time
  • This page features 5 Cited Research Articles
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A qualified expert reviewed the content on this page to ensure it is factually accurate, meets current industry standards and helps readers achieve a better understanding of retirement topics.

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APA Christian, R. (2023, June 24). Fixed Indexed Annuities. Retrieved July 9, 2024, from

MLA Christian, Rachel. "Fixed Indexed Annuities.", 24 Jun 2023,

Chicago Christian, Rachel. "Fixed Indexed Annuities." Last modified June 24, 2023.

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What Is a Fixed Indexed Annuity?

A fixed index annuity is a contract between you and an insurance company that specifies a rate of interest on your principal based on the performance of a market index.

You can purchase an annuity with a single lump-sum payment or with a series of premium payments. There are two phases to your contract: The accumulation, or savings phase, and the annuitization, or payout phase.

Fixed indexed annuities are designed to provide both principal protection in a down market and an opportunity for growth in a good market.

Your returns can vary with these financial products. They carry greater risk than fixed annuities — but also greater potential returns when the market performs well.

These products feature a minimum guaranteed interest rate as well as an interest rate tied to an index, such as the Dow Jones Industrial Average or the S&P 500.

Did You Know?
A fixed indexed annuity is not an actual investment in an index. Instead, the annuity mirrors the performance of an underlying index.

Benefits of Fixed Indexed Annuities

Fixed indexed annuities can feature key benefits and help sustain income in retirement.

It’s always important to review fixed index annuity pros and cons before making a decision.

Advantages of Fixed Index Annuities
Tax Deferred
Annuities enjoy tax-deferred compounded growth. This means you won’t pay taxes on earnings until you begin receiving your annuity payouts or withdraw funds from the account.
Principal Protection
Your original deposit to the insurance company will not decline if the index performs poorly.
Potential Lifetime Income
You can customize your contract to guarantee set payments for the rest of your life. This is done by either adding a rider at an additional cost or through a process known as annuitization at no additional cost.
Higher Interest Rates
Fixed index annuities may offer higher interest rates than bank certificates of deposit or traditional fixed annuities.
Death Benefit
If you pass away before you start taking scheduled annuity payments, your beneficiary will receive a death benefit.

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Disadvantages of a Fixed Indexed Annuity

While fixed index annuities offer advantages, you should also understand the drawbacks.

For example, all annuities come with potential surrender charges.

If you cash out your annuity early or make a big withdrawal from your account, you will pay significant surrender charges to get your principal back.

There are other fees — including broker commissions and administrative costs — associated with fixed indexed annuities.

Keep in mind that your guaranteed return is only as good as the insurance company that issues your annuity. If the insurance company goes broke, its guarantees are worthless.

Because annuities are not backed by banks, it’s important to check the financial health of any potential insurer before purchasing an annuity.

Did You Know?
All fixed indexed annuities are subject to state insurance regulations.
Other Drawbacks of Fixed Indexed Annuities
  • Fees can reduce your gains.
  • These products are complicated and can be difficult to understand.
  • Fees may not be clearly disclosed.

How Are Annuity Index Rates Calculated?

Your annuity contract will specify exactly how your index rate is calculated. This can vary by company.

Indexed annuities often use one or more features that restrict the gains applied to your contract value.

Here are some of the most common indexing features, according to the Financial Industry Regulatory Authority.

Common Indexing Features
Participation Rates
This determines how much of the percentage gain in an index is credited to your annuity. For example, the insurance company may set the participation rate at 90 percent. This means your annuity is credited with 90 percent of the gains experienced by the index.
Spread/Margin/Asset Fee
Some fixed indexed annuities use this instead of — or in addition to — a participation rate. Spread/margin/asset fees are a percentage deducted from any gain in the index. For example, if the index rose 7 percent and the spread/margin/asset fee is 2 percent, your annuity will only gain 5 percent.
Interest Rate Caps
Some fixed index annuities cap your returns, usually in the form of a percentage. For example, if the index linked to your annuity gained 9 percent but the cap rate is 8 percent, your annuity will gain 8 percent.
Last Modified: June 24, 2023

5 Cited Research Articles

  1. U.S. Securities and Exchange Commission. (2019, August 13). Investor Bulletin: Indexed Annuities. Retrieved from
  2. Stone, D. (2018, December 7). Know These 3 Things Before You Invest in a Fixed-Indexed Annuity. Retrieved from
  3. Rose, J. (2015, November 14). Don't Buy A Fixed Index Annuity Until You Read This. Retrieved from
  4. Financial Industry Regulatory Authority. (2010, September 13). Equity-Indexed Annuities: A Complex Choice. Retrieved from
  5. Financial Industry Regulatory Authority. (n.d.). Indexed Annuities. Retrieved from