Fixed Index Annuity: The Beginners Guide

Fixed Index Annuity Guide for Beginners

A fixed index annuity is a contract between you and an insurance company that may help you reach your long-term financial goals. 

In exchange for your premium payment, the insurance company provides you income, either starting immediately or at some time in the future.

NOTE: Also referred to as:

  • FIA
  • Equity Indexed Annuity
  • EIA
  • Indexed Annuity
  • Hybrid Annuity

Tax Deferral

During the accumulation phase of your contract, any interest credited is tax-deferred. If you purchase your fixed index annuity with after-tax dollars, you will only pay ordinary income taxes on your earnings – not on your premium payments – when you begin withdrawing money. 

Tax-deferred growth, compounded over time, may increase the amount of savings and income your fixed index annuity generates for your retirement.

Tax deferral is also a benefit of traditional IRAs and 401(k)s. However, annuities don’t have any government-imposed contribution limits. Because of that, they can often be a good choice if you want to save more than IRAs and 401(k)s allow and still enjoy tax-deferred growth potential.

Purchasing an annuity within a retirement plan that already provides tax deferral results in no additional tax benefit. So use an annuity to fund a qualified plan based upon features other than tax deferral, such as lifetime income options or the guaranteed death benefit.

 

Example of Tax Deferral

Tax deferral can be an effective part of your retirement strategy. For example,  this chart shows how a $100,000 initial payment, compounded at 4% annually,  grows tax-deferred. Twenty years later, after taxes are paid on the lump-sum  distribution, the amount is greater than the amount accumulated in a taxable  product after 20 years.

Tax deferral example

Tax deferral can be an effective part of your retirement strategy. For example,  this chart shows how a $100,000 initial payment, compounded at 4% annually,  grows tax-deferred. Twenty years later, after taxes are paid on the lump-sum  distribution, the amount is greater than the amount accumulated in a taxable  product after 20 years.

Protection from Market Downturns

A fixed index annuity provides upside potential based on the performance of a market index. Indexed annuities also provide downside protection from market downturns and have a floor of zero percent; meaning the worst your account can do in any given contract year is stay flat.

Index Annuity Crediting Methods

The manner in which Fixed Indexed Annuities credit interest varies from company to company and product to product. Here are some of the most common interest crediting methods seen in an index annuity

Annual Point to point

This is the simplest of all index annuity crediting methods; it is also the most common.

Annual point to point chart for index annuity crediting method 

Annual point to point uses the index value from only two points in time so this may be a good choice if you want to  minimize the effects of mid-year market volatility.

As an example let’s assume an index change of 7% and apply the cap, spread or participation rate. For this example we will assume a 5% cap, 2% spread and a 75% participation rate.

5% Cap = 5% Interest credited (index change up to the cap)

2% Spread = 5% Interest credited (index change – spread)

75% Participation Rate = 5.25% Interest Credited (index change X spread)

Index Annuity Crediting Components

Before we cover the available index annuity crediting methods we should explain the different types of crediting  components. Crediting components will affect how your indexed interest is calculated. These crediting components include:

  • Cap
  • Participation Rate
  • Spread

Cap

Some fixed index annuities set a maximum rate of interest (or cap) that the contract can earn in a specified period (usually a month or year). If the chosen index increase exceeds the cap, the cap is used to calculate your interest.

For example, if the annual cap in a hypothetical example were 3.00% and the value of the index rose by 4.80%, the cap amount of 3.00% would be credited to your contract. However. if the index change was 2%, your contract would be credited 2% since that is lower than our hypothetical cap.

Index PerformanceCapInterest Earned
8%5%5%
5%5%5%
-3%5%0%

Participation Rate

In some annuities, a participation rate determines what percentage of the index increase will be used to calculate your indexed interest.

For example, let’s suppose the index rose by 10%. If a hypothetical FIA had a 75% participation rate, the contract would receive 7.5% in indexed interest.

Index PerformancePAR RateInterest Earned
10%80%8%
5%80%4%
-5%80%0%

Spread

The indexed interest for some annuities is determined by subtracting a percentage from any gain (spread) the index achieves in a specified period.

For example, if the annuity has a 4% spread and the index increases 10%, the contract is credited 6% indexed interest.

Index PerformanceSpreadInterest Earned
10%2%8%
5%2%3%
-5%2%0%

Available Indexes

Below is a sortable and filterable table of available market indexes available inside of indexed annuities. You can sort by company or index.
Issuing Insurance CompanyAM Best RatingStock Market Index Page
American Insurance Group (AIG)AAQR DynamiQ Allocation Index
American Insurance Group (AIG)AMerrill Lynch Strategic Balanced Index MLSB
American Insurance Group (AIG)APIMCO Global Optima Index PIMGOPT
American Insurance Group (AIG)ARussell 2000 Small Cap Market Index .RUT
American Insurance Group (AIG)AMSCI EAFE - Non U.S. and Canada Index EAFE
Allianz
ABloomberg US Dynamic Balanced Index Ticker: BUDBI II
Lincoln Financial GroupA+Fidelity AIM Dividend Index Ticker: FIDAIMDN
Lincoln Financial GroupA+S&P 500 Daily Risk Control Index 5%
AtheneAAI Powered US Equity Index (Ticker: AiPex)
AtheneAS&P 500 Daily Risk Control 2 8% Index
AtheneANASDAQ Fast Convergence Index BOFANFCC
AtheneABNP Paribas Multi Asset Diversified 5 Index BNPIMAD5
AtheneAS&P 500 Daily Risk Control 5% Index
American EquityA-S&P 500 Daily Risk Control 2 8% Index
American EquityA-Dow Jones Industrial Average (DJIA)
American EquityA-S&P 500 Dividends Aristocrats Index
EquiTrust Life Insurance CompanyB++Barclays Focus50 Index (BXIIF50E)
Fidelity & Guaranty LifeBalanced Asset 10 Index. Ticker: CIBQB10E
Fidelity & Guaranty LifeA-Barclays Trailblazer Sector 5 Index (ticker BXIITBZ5)
Great American Life Insurance CompanyAS&P 500 Daily Risk Control 10% Index (Ticker : SPXT10UT)
Great American Life Insurance CompanyAIShares U.S. Real Estate ETF 1YR
Great American Life Insurance Company AS&P 500 U.S. Retiree Spending Index
Global AtlanticAPIMCO Balanced Index PIMBAL
Global AtlanticAMSCI EAFE Non U.S. and Canada Stock Index EAFE
Global AtlanticARussell 2000 Small Cap Index .RUT
Global AtlanticABlackrock Diversa Volatility Controlled Index ^IBLDV7E
Global AtlanticAFranklin U.S. Equity Index FTUSLX
North American CompanyA+NASDAQ 100 Index
Oxford LifeA-S&P 500 Index
Oxford LifeA-2 Year Citi Flexible Allocation Index CIISFM6E
Reliance StandardA+S&P 500 Index
PrincipalA+S&P 500 Index SPX

Fixed Index Annuity Rates

Below are today’s best index annuity rates based on annual point to point with a cap using the S&P 500. It is impossible to list all of the available indexes and crediting strategies in a single table. For more complete index annuity rates visit our online fixed index annuity store.

Insurance CompanyAnnuity NameAM
Best
MinimumPremium
Bonus
Annual CapFree
Withdrawal
Yr 1 | Yr
2+
TermRiders
Allianz Life Insurance Company of North AmericaAllianz Core Income 7 AnnuityA+10,0007.000% / 10%7 yrsIncluded
SILACDenali 14B+10,0006.750% / 5%14 yrsIncluded
Sentinel Security Life Insurance CompanyAccumulation Protector Plus with Rate Enhancement RiderB++5,0005.006.000% / 5%10 yrs
Atlantic Coast LifeAccumulation Protector Plus with Rate Enhancement RiderB++5,0005.006.000% / 10%10 yrs
SILACDenali 10B+10,0005.500% / 5%10 yrsIncluded
Fidelity & Guaranty LifeProsperity Elite 10 EnhancementA-10,0001.25
to 3.00
5.500% / 10%10 yrs
Fidelity & Guaranty LifeProsperity Elite 10 ProtectionA-10,0002.50
to 6.00
5.500% / 10%10 yrsIncluded
Fidelity & Guaranty LifeProsperity Elite 14 EnhancementA-10,0002.25
to 4.00
5.500% / 10%14 yrs
Fidelity & Guaranty LifeProsperity Elite 14 ProtectionA-10,0003.75
to 7.00
5.500% / 10%14 yrsIncluded
Fidelity & Guaranty LifeProsperity Elite 7 EnhancementA-10,0001.25
to 2.00
5.500% / 10%7 yrs
Fidelity & Guaranty LifeProsperity Elite 7 ProtectionA-10,0003.00
to 4.00
5.500% / 10%7 yrsIncluded
SILACTeton 14B+10,0005.500% / 5%14 yrs
Great American Life Insurance CompanyAmerican Legend 7 High BandA+100,0005.2510% / 10%7 yrsOptional
SILACDenali 10 (DE, ID, MA, MO, NV, SC, TX)B+10,0005.250% / 5%10 yrsIncluded
Great American Life Insurance CompanyAmerican Legend 7 Low BandA+10,0005.0010% / 10%7 yrsOptional
SILACDenali 7B+10,0005.000% / 5%7 yrsIncluded
SILACDenali Bonus 14B+10,0005.00
to 10.00
5.000% / 5%14 yrsIncluded
Great American Life Insurance CompanyIndex Protector 4 Non MVA High BandA+250,0005.0010% / 10%4 yrs
Nassau Life and Annuity CompanyNassau Growth Annuity 10 Group AB+15,0005.005% / 5%10 yrs
American National Insurance CompanyStrategy Indexed Annuity PLUS 10A5,000 QL
10,000 NQ
1.005.0010% / 10%10 yrsOptional
Guaranty Income LifeWealthChoice 7B++20,0005.0010% / 10%7 yrsOptional
Great American Life Insurance CompanyIndex Protector 4 Non MVA Low BandA+50,0004.9010% / 10%4 yrs
American National Insurance CompanyStrategy Indexed Annuity PLUS 7A5,000 QL
10,000 NQ
4.8510% / 10%7 yrsOptional
Sentinel Security Life Insurance CompanyAccumulation Protector PlusB++5,0005.004.800% / 5%10 yrs
Atlantic Coast LifeAccumulation Protector PlusB++5,0005.004.800% / 5%10 yrs
Great American Life Insurance CompanyAmerican Legend 7 Non-MVA High BandA+100,0004.7510% / 10%7 yrsOptional
SILACTeton 10B+10,0004.750% / 5%10 yrs
Allianz Life Insurance Company of North AmericaAllianz 360 AnnuityA+20,0004.600% / 10%10 yrsIncluded
Great American Life Insurance CompanyAmerican Legend 7 Non-MVA Low BandA+10,0004.5010% / 10%7 yrsOptional
American Equity Investment Life Insurance CompanyCalifornia IncomeShield 7A-5,0004.50Int / 10%7 yrsIncluded
American Equity Investment Life Insurance CompanyIncomeShield 7A-5,0004.50Int / 10%7 yrsIncluded
Nassau Life and Annuity CompanyNassau Growth Annuity 10 Group A with IncomeB+15,0004.505% / 5%10 yrsOptional
Nassau Life and Annuity CompanyNassau Growth Annuity 10 Group BB+15,0004.505% / 5%10 yrs
Fidelity & Guaranty LifePerformance Pro with GMWBA-10,0004.00
to 9.00
4.500% / 10%10 yrsIncluded
Sentinel Security Life Insurance CompanyPersonal Choice Plus+ (86-90) *FEE*B++5,0004.500% / 0%5 yrs
Sentinel Security Life Insurance CompanyPersonal Choice Plus+ (CA, FL) *FEE FOR WAIVERS*B++5,0004.500% / 0%5 yrs
Sentinel Security Life Insurance CompanyPersonal Choice Plus+ *FEE FOR WAIVERS*B++5,0004.500% / 0%5 yrs
American+B1:L39 General Life Insurance CompanyPower 10 Protector High BandA100,0004.5010 yrs

Rates change frequently - stay informed with monthly annuity rate updates.

Index Annuity Advantages

#1. Gain Compounded Earnings While Deferring Income Taxes

Earnings within an annuity contract are tax deferred. This means you do not pay income taxes on the earnings until you withdraw gains from your account. Therefore, there are no annual 1099 forms to file or earned-interest entries to make on your 1040. Tax deferral also means that annuity earnings do not offset Social Security benefits as with earnings from bonds, CDs, and other investments. 

#2. Earn Higher Interest Rates

Fixed index annuities may credit higher interest rates than bank CDs or fixed interest rate deferred annuities.

#3. Make Contributions to Your Tax-Deferred Account

Investors who have maximized contributions to their qualified retirement plans (i.e. 401k, IRAs, and pensions) are permitted to contribute without limit to a tax-deferred annuity.

#4. Protect Your Principal from Downturns in the Credit Markets

When interest rates trend upward, annuity accounts are insulated from loss of principal; increasing interest rates often negatively impact government bonds and bond mutual funds. Unlike bonds which lose principal value during periods of rising interest rates, the account value of a fixed index annuity is guaranteed. 

#5. Retire Early Without Penalty

Annuities can offer valuable tax-savings for employees under the age of 59½ who receive large, lump-sum distributions from their 401(k) profit-sharing plans as part of an early retirement or severance package. Such amounts can be “rolled over” into an annuity policy without having to recognize taxable income. 

#6. Satisfy Required Minimum Distributions (RMDs)

Retirees over the age of 70½ are required to begin taking withdrawals from their IRA or Pension plans, known as Required Minimum Distributions (RMDs). The IRS penalty for not doing so is a substantial 50% of any amount that falls short of the Required Minimum Distribution. 

#7. Retire with Lifetime Income

By “annuitizing” your IRA or fixed index annuity, you can exchange its value for an “immediate annuity” income stream in any of several forms (see earlier discussion on “Immediate Annuities”). 

#8. Lifetime Income More Flexible Than Annuitization 

An annuity is really the only financial vehicle that can guarantee you a paycheck as long as you live, even if you lived to be 110. Most often we hear of single premium immediate annuities when talking about turning a lump sum into a lifetime income stream.
 
Fixed Index Annuities have Guaranteed Lifetime Withdrawal Benefit Riders (GLWB) that also guarantee a monthly income stream you can not outlive. The benefit of a Fixed Index Annuity vs an immediate annuity is you still maintain control of your asset should the unexpected arise. Whereas, when you annuitize your no longer have the asset.
 

#9. You Protect Your Beneficiaries

Fixed Index Annuities pay full account value at death directly to your elected beneficiary avoiding probate. 

#10. Locked-in earnings

Your indexed interest is credited to your fixed-indexed annuity at the end of each term. Any interest credited to your fixed-indexed annuity is locked in and protected from future market declines, “What Goes Up Doesn’t Have to Come Down.”

#11. Additional Benefits Available with Optional Riders

Some fixed indexed annuities offer optional riders such as living benefit riders (Long Term Care Riders)  for guaranteed lifetime income or enhanced death benefits to aid with legacy planning. 

#12. Re-allocate Among Available Crediting Options Annually

When you purchase an indexed annuity you can spread your money amongst all of the available options or place it all into any of the available options. In addition, you have the ability to re-allocate among the available options each year your contract anniversary (typically a 30 day window at each anniversary). 

FAQs

Yes. Insurance companies as a whole have a long history of stability, even through our nation’s most difficult economic times. Fixed index annuities, unlike variable annuities, are backed by the full faith and credit of the issuing insurance company.

 
 

Fixed index annuities are a type of fixed annuity that earns interest based on changes in a market index, which measures how the market or part of the market performs. The interest rate is guaranteed to never be less than zero, even if the market goes down.  The return earned in a variable annuity isn’t guaranteed.

Fixed Index Annuities are a type of fixed annuity that offers a change to earn more when the markets perform and downside protection from potential market downturns.

In the broadest terms, an annuity is a contract between you and an insurance company, where you make a premium payment(s) in exchange for the benefits defined in the contract.

A fixed index annuity does not have any upfront fees or sales charges; meaning 100% of your purchase amount is credited towards your account value.  Additional riders may be added for an annual fee on some indexed annuity contracts.

Most indexed annuities offer 10% free withdrawal of your account value annually. Additionally, most index annuities come with a nursing home and terminal illness waiver that make your annuity 100% liquid should become diagnosed with terminal illness or confined to a facility.

Additional Resources

Annuities are distributed by My Annuity Store, Inc. Guarantees are subject to the claims-paying ability of the insurer. My Annuity Store, Inc. does not advise clients on the purchase of non-fixed annuity products. The information presented here is not intended to be a recommendation to purchase a fixed annuity (MYGA), fixed index annuity(FIA), variable annuity (VA), registered index linked annuity (RILA), immediate annuity (SPIA), longevity annuity, or Qualified Longevity Annuity Contract (QLAC). 

The contract features described may not be current and may not apply in the state in which you reside. Insurance companies often issue contracts which are ‘state-specific’. Insurance companies also change their products and information often and without notice. Annuities are subject to the terms and conditions of the specific contract issued by the insurer, are not FDIC or NCUA insured, are not bank guaranteed, may lose value, and are not a deposit. Please call (855) 583-1104 if you have any questions or concerns. 

The information presented here is not a representation regarding the suitability of any concept or product(s) for an individual and it does not provide tax or legal advice. You should always consult your own financial planning, tax, and legal advisors to determine if a fixed annuity, fixed index annuity, annuity with long term care rider, immediate annuity, longevity annuity, or Qualified Longevity Annuity Contract are suitable in your financial situation.