A reference for the moving parts an FIA illustration puts in front of you: how interest is credited, what each limiting lever does to your return, which crediting methods behave how, and what the carrier can change after you sign.
A fixed index annuity credits interest based on the movement of a market index, with two hard boundaries. You cannot lose money to index declines, and you do not get the full index gain. You are not invested in the index and you do not receive its dividends.
The carrier buys options on the index with the interest its bond portfolio earns. What those options can buy is what sets your cap or participation rate. That is the single most useful thing to understand about FIA pricing: the levers below are not arbitrary. They all come out of the same Options budget, which is why a carrier can raise the cap only by taking something else away.
Income riders, which bolt lifetime income onto an FIA, have their own page: Income riders.
Usually the wrong answer when
You want a known yield (buy a MYGA instead), you need the money inside the surrender period, or the product is being sold on its bonus or its roll-up rate rather than on what it credits. An FIA with a term longer than 10 years is rarely the right answer for anyone past their mid-50s; the extra years buy the carrier flexibility, not you.
Six terms that describe the machine. Everything else on this page is a setting on it.
What is a fixed index annuity, in plain English?
DefinitionA fixed index annuity (FIA) is a fixed annuity whose interest is calculated from the change in a market index over a set term, credited at no less than 0% and limited by a cap, participation rate or spread.
Your premium goes into the carrier’s General account, the same place a MYGA premium goes. Instead of paying you a declared rate, the carrier spends roughly what that rate would have cost on index options. When the index rises, the options pay and you are credited interest up to the contract’s limits. When it falls, the options expire worthless and you are credited zero.
The contract has a Surrender period, usually 7 to 10 years, a Free withdrawal provision, and the standard Waivers. Most offer an optional Income rider.
Illustrative
$100,000 in an FIA with a 9% annual cap on the S&P 500. Year one the index gains 14%: you are credited 9%, account value $109,000. Year two the index falls 18%: you are credited 0%, account value stays $109,000. Year three it gains 6%: you are credited 6%, account value $115,540.
Watch for
“Market upside with no downside” is the pitch. The honest version is “part of the upside in good years, none of the downside, and no dividends.” Over long periods the dividends alone are a meaningful part of what an index fund earns. See FIA vs index fund.
Related: Index-linked interest · 0% floor · Options budget · Fixed annuity · FIA vs MYGA
If I am not invested in the index, how does it pay me?
DefinitionIndex-linked interest is interest the carrier credits to your account value based on a formula applied to an index’s change over the crediting term; it is a contractual credit, not a market return.
At the start of each Crediting term the carrier records the index level. At the end it measures the change under the contract’s crediting method, applies the limiting lever, and credits the result. Once credited, interest is locked in and cannot be lost to later index declines.
Watch for
The credit is interest, taxed as ordinary income when withdrawn, never as a capital gain. See Ordinary income.
Related: Crediting term · Crediting methods · The limiting levers · No dividends
Can I actually lose money in an FIA?
DefinitionThe 0% floor guarantees that index-linked interest for any crediting term is never less than zero, so a falling index cannot reduce your account value.
The floor applies to the index credit only. Rider fees and any strategy fee are deducted from the account value regardless, so a contract with a 1% rider fee loses 1% in a flat year. Surrender charges and a Market value adjustment can reduce what you receive on an early exit.
Illustrative
$100,000, 0% index year, 1.10% income rider fee charged on a $120,000 benefit base: account value falls to about $98,680. The floor held; the fee did not care.
Watch for
“You can’t lose money” is true of the index credit and false of the contract once fees are attached. Ask what the account value does in a 0% year with every fee applied.
Related: Fixed index annuity · Rider fee · Fee-based strategies · RILA floor
Why can’t the carrier just offer a higher cap?
DefinitionThe options budget is the amount, roughly the yield on the carrier’s bond portfolio minus its costs, that the carrier can spend each term on index options; it sets how generous every cap, participation rate and spread can be.
If bonds yield 5.5% and the carrier needs 1.5% for expenses and profit, about 4% is available to buy options. A one-year S&P 500 call spread that pays up to a 9% cap might cost about 4% in a given month; when option prices rise or bond yields fall, the same budget buys a lower cap. That is why caps move with interest rates and volatility.
Every lever on the contract is a different way to spend the same budget. A Volatility-controlled index makes options cheaper, so the same budget buys a higher Participation rate.
Watch for
A cap far above the market is funded somewhere: a longer surrender period, a lower renewal cap, a strategy fee, or a bonus that vests slowly. Find the “somewhere” before you sign.
Related: Cap rate · Participation rate · How carriers set fixed rates · Renewal caps and participation rates · Volatility-controlled index
How often is interest actually credited?
DefinitionThe crediting term, or segment term, is the period over which index change is measured and at the end of which interest is credited and locked in, commonly one year, sometimes two or more.
One-year terms reset at each Contract anniversary. Longer terms (two, three, five years) usually carry higher caps or participation rates but credit nothing until the term ends. During a multi-year term, the Interim strategy value governs what you get on withdrawal or death.
Watch for
Surrendering or withdrawing mid-term forfeits that term’s index credit on most contracts. If you plan to take money, do it just after an anniversary.
Related: Index segment · Annual point-to-point · Multi-year point-to-point · Interim strategy value · Contract anniversary
What is a segment on my FIA statement?
DefinitionAn index segment is a portion of the account value allocated to one crediting strategy for one crediting term; a contract can hold several segments at once.
If you allocate 50% to an S&P 500 annual cap strategy and 50% to a two-year volatility-controlled participation strategy, you have two segments with different terms, caps and lock-in dates. Each is tracked separately on the statement. See Allocation.
Watch for
Segments with different term lengths end on different dates, so the day you can reallocate everything at once may come only every two or three years.
Related: Allocation · Crediting term · Reallocation at anniversary · Mixing strategies
Most contracts offer the S&P 500 alongside several proprietary or volatility-controlled indices. The index you pick changes the whole deal, and the illustration rarely makes that obvious.
Is the S&P 500 the best index to pick?
DefinitionThe S&P 500 price index tracks 500 large U.S. companies without dividends; it is the most common FIA index and the easiest to verify yourself.
S&P 500 strategies usually use a Cap rate, or a participation rate below 100%, because the index is volatile and options on it are expensive. You can check your credited interest against any financial website, which is not true of a Proprietary or hybrid index.
Watch for
The FIA tracks the price index, not the total return. Over long periods dividends have been a large share of the S&P 500’s return, and you do not get them. See No dividends.
Related: No dividends · Cap rate · Nasdaq-100 · Volatility-controlled index
Can I get Nasdaq exposure in an FIA?
DefinitionThe Nasdaq-100 is a price index of 100 large non-financial companies listed on the Nasdaq exchange, heavily weighted to technology; some FIAs offer it as a capped strategy.
Because the Nasdaq-100 is more volatile than the S&P 500, options on it cost more and caps are usually lower. In strong technology years the cap binds early; in weak years the floor does the work.
Watch for
A lower cap on a more volatile index is not more upside. Compare the cap, not the index’s reputation.
Related: S&P 500 · Russell 2000 · Cap rate · Options budget
What is the Russell 2000 doing on my allocation form?
DefinitionThe Russell 2000 is a price index of roughly 2,000 smaller U.S. companies; a handful of FIAs offer it as a diversifier to the large-cap indices.
Small-cap stocks move differently from large caps, which is the appeal. The index is volatile, so caps tend to be lower than S&P 500 caps on the same contract. It is usually offered as an annual capped strategy.
Watch for
Diversifying across indices inside an FIA helps less than it sounds, because every strategy is still floored at zero and capped above. See Mixing strategies.
Related: S&P 500 · Mixing strategies · Cap rate
Can an FIA give me international exposure?
DefinitionMSCI EAFE is a price index of large and mid-size companies in developed markets outside the U.S. and Canada (Europe, Australasia, Far East); some FIAs offer it as an international option.
It behaves like the S&P 500 strategies on the same contract: usually a one-year cap, no dividends, floor at zero. Currency moves are embedded in the index level.
Watch for
Check whether the index is price return or excess return; international indices in FIAs are often the latter, which quietly lowers the measured gain.
Related: S&P 500 · Price return vs excess return · Mixing strategies
Why does this index I have never heard of have a 140% participation rate?
DefinitionA volatility-controlled index automatically shifts between stocks and cash (or bonds) to hold its volatility near a target, often 5% to 10%; the lower volatility makes options cheap, so carriers can offer high participation rates on it.
When markets get choppy, the index moves money into cash and its exposure to stocks drops. When markets are calm, exposure rises. The result is a smoother line with a lower expected return than the raw index. A 140% participation rate on a 5%-volatility index is not the same opportunity as 50% of the S&P 500, and in strong, fast rallies the controlled index often lags badly.
Illustrative
S&P 500 up 20% in a year with a sharp spring selloff. A 5% volatility-controlled version might finish up 7%. At 140% participation that credits 9.8%; the S&P strategy with a 9% cap credits 9%. Nearly identical, despite the 140% headline.
Watch for
Most volatility-controlled indices are also excess return indices and many are back-tested rather than lived. All three features lower the real result below what the participation rate suggests.
Related: Proprietary or hybrid index · Participation rate · Price return vs excess return · Back-tested index data · Options budget
Should I trust an index built just for annuities?
DefinitionA proprietary or hybrid index is one created by a bank or index provider specifically for insurance products, often blending stocks, bonds and commodities under a volatility control, and licensed exclusively to one or a few carriers.
Carriers like them because the options are cheap and because exclusivity makes comparison shopping harder. Buyers get a high participation rate and sometimes an uncapped strategy. Whether that beats a plain S&P 500 cap depends entirely on how the custom index performs, which nobody can know in advance.
Watch for
Ask three things: how long has the index actually existed (not back-tested), is it price or excess return, and what has the carrier’s renewal participation rate done on it. Treat an index with under five years of live history as an unknown.
Related: Volatility-controlled index · Back-tested index data · Price return vs excess return · Rate history
What does “excess return” mean next to the index name?
DefinitionA price return index measures the change in its components’ prices; an excess return index subtracts a short-term interest rate from that change, so it grows more slowly, especially when rates are high.
Most proprietary and volatility-controlled FIA indices are excess return. If the underlying assets return 8% and short-term rates are 4%, the excess return index shows roughly 4%. The participation rate is then applied to that smaller number. Carriers use excess return indices because they make the options cheaper, which funds the higher participation rate.
Watch for
In a 5% rate environment an excess return index carries a 5%-a-year handicap before you earn anything. That is why “uncapped, 150% participation” can credit less than a 9% cap on the plain S&P 500.
Related: Volatility-controlled index · Proprietary or hybrid index · Participation rate · No dividends
Do I get the dividends the index companies pay?
DefinitionFIA interest is calculated on a price index, which excludes dividends; you receive none of the dividend income the underlying companies pay.
Dividends have historically accounted for a meaningful share of total stock market return. An index fund collects them; an FIA strategy on the price index does not. This is a structural reason FIA credits trail the market over long periods even before caps are applied.
Watch for
Any illustration or sales chart comparing an FIA to “the S&P 500” should say whether the comparison line includes dividends. If it does not, the comparison flatters the FIA.
Related: S&P 500 · FIA vs index fund · Price return vs excess return
The index chart goes back to 2005 but the index was launched in 2021. How?
DefinitionBack-tested index data is a simulated history showing how an index would have performed under its current rules before it actually existed; it is hypothetical and tends to look better than live results.
Index designers choose rules that would have worked well in the past, so the back-test is, by construction, a flattering period. Regulators require disclosure and limit how back-tested data can be illustrated; NAIC Model 245 does not allow index returns to be illustrated at all until the index has existed for ten calendar years. See AG 49-A illustration limits.
Watch for
Ask for the index’s live inception date and compare live performance to the back-test. A large gap is common and tells you what the back-test was worth.
Related: Proprietary or hybrid index · Volatility-controlled index · AG 49-A illustration limits · Historical lookback
Every crediting method is some combination of these ways to limit what you are credited. Once you can name which one a product uses, comparing two illustrations gets much easier.
What does the cap rate do to my return?
DefinitionThe cap rate is the maximum interest you can be credited for the term, no matter how far the index rises.
If the cap is 9% and the index gains 14%, you are credited 9%. If it gains 6%, you are credited 6%. Caps are the most common lever and the easiest to compare across carriers, which is exactly why they are the most competitively priced. The first-year cap is set at issue; later caps are declared each term and can fall, never below the guaranteed minimum.
Illustrative
$100,000, 9% cap. Index years of +14%, +6%, −10%, +20%: credits of 9%, 6%, 0%, 9%. Ending value about $126,000. An uncapped strategy with the same 0% floor would have credited about +45% over the same four years; the cap gave up roughly 19 points of that in exchange for the floor and a cheaper option.
Watch for
The illustrated cap is a first-year number. The carrier’s Rate history on in-force contracts tells you what caps become. A 10% cap that renews at 5% is a 5% product with a one-year promotion.
Related: Participation rate · Spread · Performance trigger · Renewal caps and participation rates · Annual point-to-point
What is a participation rate and is 100% good?
DefinitionThe participation rate is the share of the index gain you are credited, with no ceiling above it unless a cap is also applied.
At a 50% participation rate, a 14% index gain credits 7%. Participation rates shine in strong years, where there is no cap to stop you, and disappoint in mild ones, where a capped product would have given you the whole move. A 6% index year credits 3% here and 6% under a 9% cap.
Rates above 100% exist mostly on volatility-controlled and excess return indices, where the index itself moves less. See the explainer below to compare the levers on the same index year.
Watch for
“100% participation” on an index that returned 3% is 3%. Always ask what the index is, not just what the rate is.
Related: Cap rate · Spread · Volatility-controlled index · Minimum guaranteed cap and participation · RILA cap and participation
What is a spread, margin or asset fee on an index strategy?
DefinitionA spread, also called a margin or asset fee, is a fixed percentage subtracted from the index gain before anything is credited; it is not charged when the index is flat or down.
With a 3% spread, a 14% gain credits 11% and a 2.5% gain credits nothing. Spreads are the harshest design in modest years and the most generous in strong ones, which makes them a bet on big moves more than on direction. Carriers tend to use them on uncapped or high-participation accounts.
Watch for
A spread is not a fee deducted from your account value, so it cannot take you below zero; a strategy fee can. The two are easy to confuse on an illustration.
Related: Cap rate · Participation rate · Fee-based strategies · Performance trigger
What is a performance-triggered strategy?
DefinitionA performance trigger credits a flat declared rate whenever the index is flat or positive over the term, regardless of how much it rose, and 0% if it finishes down.
A 6.5% trigger credits 6.5% if the index finishes up 0.1% or up 40%, and 0% if it finishes down. This design wins sideways markets and loses big ones. It suits someone who expects choppy years and wants a more predictable credit.
Watch for
It is the lever most often misread as “6.5% guaranteed.” It is guaranteed only in the years the index does not fall, and the trigger rate itself renews annually.
Related: Cap rate · Spread · Dual direction · Renewal caps and participation rates
Should I pay a 1% fee for the higher cap?
DefinitionA fee-based strategy charges an explicit annual fee, often about 1% of the allocated value, in exchange for a meaningfully higher cap or participation rate; the fee is charged whether or not any interest is credited.
Several carriers offer the same index account in two versions: one with no explicit charge and one that deducts roughly 1% a year for a higher cap. The fee version wins when the index performs well enough that the extra credit clears the charge, and loses in flat and down years, where you pay the fee and are credited zero, giving up principal in a product you bought partly to avoid that.
Illustrative
No-fee version: 8% cap. Fee version: 11% cap, 1% fee. Index +15%: fee version nets 10% vs 8%. Index +5%: both credit 5%, fee version nets 4%. Index −10%: no-fee credits 0%, fee version nets −1%.
Watch for
Whether the trade is worth it depends on how many flat years you expect, which is the forecast nobody can make reliably. The fee also breaks the “cannot lose money” promise; say so to anyone who bought the product for that promise.
Related: Cap rate · 0% floor · Spread · Rider charges
How low can the carrier set my cap at renewal?
DefinitionThe minimum guaranteed cap and participation rate are the contractual floors below which renewal caps and participation rates cannot be set, often as low as 1% and 10%.
They appear in the contract’s specification pages. They matter only if the carrier renews aggressively against you; they are the worst case, and on a 10-year contract the worst case is what you are agreeing to.
Watch for
A 1% minimum cap means the carrier could, in principle, turn your FIA into a near-zero product while the surrender charge keeps you in it. The carrier’s renewal track record is the only protection. See Rate history.
Related: Renewal caps and participation rates · Rate history · Guaranteed vs non-guaranteed elements · Minimum guaranteed rate
Explainer: cap vs participation vs spread vs trigger on the same index return
Illustrative. Assumes a 9.00% cap, 50% participation, 3.00% spread and a 6.50% trigger. Change the index return to see which design wins at that level.
The levers above decide how much of a move you keep. The crediting method decides how the move is calculated in the first place, and two products with identical caps can credit very differently because of it.
What does annual point-to-point mean?
DefinitionAnnual point-to-point compares the index value on your contract anniversary to its value one year earlier, ignoring everything in between, and applies the cap, participation rate or spread to that change.
It is the cleanest design, the easiest to verify yourself, and the default on most contracts. Each year starts fresh at the new index level, so a bad year costs you nothing and does not have to be “made up” before the next credit.
Illustrative
Index 4,000 on the anniversary, 4,480 a year later: +12%. With a 9% cap, credit 9%. With 50% participation, credit 6%. With a 3% spread, credit 9%.
Watch for
Everything depends on two dates. A rally that peaks in month 11 and fades by the anniversary credits only what is left on the day.
Related: Two-year point-to-point · Monthly point-to-point · Monthly average · Cap rate · Contract anniversary
Is a two-year term worth the higher cap?
DefinitionTwo-year point-to-point measures the index change over two contract years and credits once at the end, usually with a higher cap or participation rate as compensation for the longer lock-in.
Same calculation as annual, over two years. The catch is that a strong first year and a weak second can net to nothing, where two separate one-year terms would have locked the first year’s gain permanently. You are trading annual reset for a better headline rate.
Illustrative
Year one +15%, year two −12%: two-year change about +1.2%, credited in full. Two annual terms with a 9% cap would have credited 9% then 0%.
Watch for
Nothing is credited until the end of year two, so a withdrawal or death in month 20 may receive only the Interim strategy value.
Related: Annual point-to-point · Multi-year point-to-point · Interim strategy value · Crediting term
What about three- and five-year strategies?
DefinitionMulti-year point-to-point measures the index over three or more years and credits once at the end, typically with uncapped or high-participation terms.
Carriers can afford richer terms because they buy one long option instead of several short ones. The trade-offs scale with the term: more years with no credit, more exposure to a bad final year, and a longer wait before you can reallocate.
Watch for
A five-year term inside a seven-year contract leaves you one shot at a credit before year six. If the five years end badly, there is no time to recover.
Related: Two-year point-to-point · Crediting term · Interim strategy value · Participation rate
What is a monthly sum or monthly cap strategy?
DefinitionMonthly point-to-point, or monthly sum, caps each month’s index change on the upside (often 1.5% to 3%) but counts losses in full, then adds the twelve results together for the year’s credit, floored at zero.
One bad month can erase four good ones. Twelve months of +2% with a 2% monthly cap credit 24%, which is the headline the design is sold on. Replace one of those months with −8% and the credit is 14%. Replace two and it is 4%. This design credits well in a quiet, steadily rising year and badly in a volatile one, and it is the hardest for a buyer to model.
Watch for
The illustrated “potential” is the all-up-months number, which has roughly never happened. Use the explainer below with a realistic mix of months.
Related: Annual point-to-point · Monthly average · Cap rate · High-water mark
How does monthly averaging change the credit?
DefinitionMonthly average crediting compares the average of the index’s twelve monthly values to the starting value, then applies the cap or participation rate to that smaller, smoother change.
Averaging smooths out a spike near the end of the year, so a steadily rising market credits much less than the point-to-point number suggests: a straight-line 12% year averages to about 6.5%. It helps only when the index rises early and falls late. It reads well on an illustration and usually underperforms annual point-to-point in practice.
Watch for
Carriers pair averaging with higher caps or participation rates for this reason. A 100% participation monthly average strategy is often worth less than a 9% cap annual point-to-point.
Related: Annual point-to-point · Daily average · Monthly point-to-point · Participation rate
Is daily averaging any different from monthly?
DefinitionDaily average crediting uses the average of every trading day’s index value over the term instead of twelve monthly points; it behaves like monthly averaging with slightly more smoothing.
The mechanics and the drawbacks are the same as Monthly average: a rising market credits about half the point-to-point change. It appears on a minority of contracts.
Watch for
Averaging designs are rarely the best strategy on a contract. If it is the only one with a high participation rate, that is why.
Related: Monthly average · Annual point-to-point
Can an FIA pay me when the index goes down?
DefinitionA dual direction strategy credits the absolute value of the index change, up or down, within a stated range, so a 6% decline can credit a positive 6%; beyond the range the normal cap and floor apply.
Typical terms: credit the absolute move up to a cap of, say, 8% on the upside and 8% on the downside; declines beyond 8% credit zero (the floor still holds on an FIA). It pays in moderate down years and gives up some upside cap to fund that. The RILA version, Dual direction (RILA), does not have the floor.
Watch for
Dual direction is priced for mild moves in either direction. A large decline, the scenario the buyer is most afraid of, credits 0% just like any other strategy.
Related: Performance trigger · Cap rate · Dual direction (RILA) · 0% floor
What is a high-water mark strategy?
DefinitionA high-water mark strategy measures the index change from the start of the term to its highest anniversary (or monthly) value during the term, rather than to the end value.
Over a multi-year term, the carrier looks back at each anniversary’s index level and uses the highest one. A term that peaks in year two and fades credits the year-two gain. Caps and participation rates are lower to pay for the look-back.
Watch for
The mark is usually taken only on anniversaries, not daily. A peak in month 18 that is gone by the second anniversary does not count.
Related: Multi-year point-to-point · Monthly point-to-point · Participation rate
What is a blended or multi-index strategy?
DefinitionA multi-index blended strategy credits interest on a weighted mix of several indices, sometimes weighting the best performer most heavily after the fact.
A simple blend might be 50% S&P 500, 30% MSCI EAFE, 20% Russell 2000, measured annual point-to-point and capped. A “best of” blend weights the top index at 50% and the others less, which raises the measured gain and lets the carrier advertise it with a lower cap.
Watch for
Blending inside one strategy and Mixing strategies across several are different things. The first is a formula you cannot change; the second is an allocation you can.
Related: Mixing strategies · Allocation · Cap rate · MSCI EAFE
Can I park part of the money at a fixed rate inside the FIA?
DefinitionThe fixed account is a strategy inside an FIA that credits a declared interest rate for the year, unrelated to any index, usually resettable each anniversary.
It works like a one-year Traditional declared-rate fixed annuity inside the contract. Rates are usually below a MYGA’s because the carrier’s Options budget is sized for index options, not declared rates. It is useful as a holding place and for buyers who want part of the money certain.
Watch for
The fixed account rate renews annually and can fall to its own minimum. If you want most of the money at a fixed rate, a MYGA pays more and locks longer.
Related: Allocation · Traditional declared-rate fixed annuity · MYGA · Mixing strategies
Explainer: the same twelve months under three crediting methods
Illustrative. Enter twelve monthly index changes. Assumes a 9% annual cap for point-to-point and monthly average, and a 2% monthly cap (losses uncapped) for monthly sum. All methods floor at 0%.
You choose how the account value is split across strategies, and you can usually change it once a year.
How do I decide where to put the money inside the FIA?
DefinitionAllocation is the percentage split of your account value across the contract’s crediting strategies and fixed account, chosen at issue and adjustable at each anniversary.
Most contracts offer four to twelve strategies. Allocations are set in whole percentages and must total 100%. There is no right answer, because each strategy wins in a different kind of year; see Mixing strategies. We generally favor the strategies you can verify (S&P 500 point-to-point) for most of the allocation.
Watch for
An allocation form that defaults 100% to a proprietary uncapped index is a choice the carrier made for you. Make it yourself.
Related: Mixing strategies · Reallocation at anniversary · Index segment · Fixed account
Can I change strategies after I buy?
DefinitionReallocation at anniversary is your right to move money between strategies when a crediting term ends, usually by written or online election before the anniversary date.
Carriers send the new caps and participation rates shortly before the anniversary with a reallocation form. If you do nothing, the current allocation continues under the new rates. Money in a multi-year segment cannot move until that segment ends.
Watch for
The renewal rate notice is the most important mail your FIA will ever send you. If a cap has dropped sharply, that is the moment to move to a better strategy, or to the fixed account.
Related: Allocation · Renewal caps and participation rates · Contract anniversary · Changing allocations
Should I split between a cap and a participation strategy?
DefinitionMixing strategies means allocating across several crediting methods so that at least part of the account value is positioned for whatever kind of year the index has.
A cap wins in modest years, participation wins in strong years, a trigger wins in flat-but-positive years, and nothing wins in a down year. Splitting 50/50 between a 9% cap and 50% participation on the S&P 500 gives a middle result in every scenario, which is the point.
Watch for
Mixing reduces regret, not risk. Every strategy already has the floor. Do not spread across six strategies just because the form allows it; two or three you understand is better.
Related: Allocation · Cap rate · Participation rate · Multi-index blended strategies
What is my money worth in the middle of a two-year term?
DefinitionThe interim strategy value is the value a multi-year segment is given between crediting dates for withdrawals, surrender or death, calculated by a contract formula rather than the actual index credit.
Carriers cannot know the final credit mid-term, so the contract defines an interim value, often the starting value plus a fraction of the index gain to date, or the starting value alone. Some contracts use a formula tied to the market value of the options.
Watch for
On many contracts the interim value is simply the starting value, so dying or surrendering in month 23 of a 24-month term forfeits the entire credit. Ask before choosing long terms.
Related: Two-year point-to-point · Multi-year point-to-point · Crediting term · Death benefit
Bonuses raise the day-one number. Renewals set every number after that. Both are where the carrier’s pricing room lives.
Is a 10% premium bonus free money?
DefinitionA premium bonus is a percentage of premium, commonly 2% to 12%, credited to the account value or benefit base at issue, in exchange for a longer surrender period, lower caps, a vesting schedule or some combination.
The carrier funds the bonus out of the same Options budget that pays for caps, so a bonus contract typically has lower caps for its entire life. Many bonuses apply only to the Benefit base of an income rider, not to the money. Those that go to the account value usually vest over years and face recapture on early surrender.
Illustrative
Contract A: 8% bonus, 6% cap. Contract B: no bonus, 9% cap. Index years of +12%, +12%, +12%, +12%, +12%: A ends at about $144,500 on $100,000; B at about $153,900. The bonus is overtaken in year three.
Watch for
A bonus can make sense when it offsets a surrender charge on a contract being replaced, and almost never otherwise. Run the ten-year math with realistic caps before you let the bonus decide.
Related: Bonus vesting · Bonus recapture · Bonus fixed annuity · Benefit base bonus · Options budget
Why does the statement show a “vested” and an “unvested” bonus?
DefinitionBonus vesting is a schedule under which the premium bonus becomes yours gradually, often 10% a year over ten years, so an early surrender forfeits the unvested portion.
The full bonus is shown in the account value and earns interest, but only the vested share is paid on surrender. Death usually vests the bonus in full; some contracts vest it on annuitization or nursing home confinement too.
Watch for
Vesting plus the surrender charge can take a large bite. On a 10% bonus contract in year three, surrender might forfeit 7% of unvested bonus plus an 8% surrender charge on the rest.
Related: Premium bonus · Bonus recapture · Surrender charge schedule
Can the carrier take the bonus back?
DefinitionBonus recapture is a provision that deducts some or all of a premium bonus on withdrawals above the free amount or on surrender during the surrender period, separate from and in addition to the surrender charge.
Some contracts recapture proportionally: withdraw 20% of the account value early and 20% of the bonus is removed. Others recapture the whole unvested bonus on any full surrender. The recapture schedule usually mirrors the surrender schedule.
Watch for
Recapture can apply to partial withdrawals that are otherwise free. Read the bonus endorsement, not the brochure.
Related: Premium bonus · Bonus vesting · Excess withdrawal · Partial surrender
Will my cap stay at 10%?
DefinitionRenewal caps and participation rates are the new limits the carrier declares for each crediting term after the first; they are non-guaranteed and can rise or fall within the contract’s minimums.
Carriers reset rates based on their options budget and their appetite for keeping the business. Some hold renewals close to new-business rates; some cut hard once the surrender charge has you. The contract’s Minimum guaranteed cap and participation is the only limit.
Watch for
Ask the carrier, through your agent, for the renewal cap history on a contract issued five years ago. Carriers that will not provide it are telling you something. See Rate history.
Related: Rate history · First-year teaser rates · Minimum guaranteed cap and participation · Reallocation at anniversary · Guaranteed vs non-guaranteed elements
Is the first-year cap a teaser?
DefinitionA first-year teaser rate is an unusually high initial cap or participation rate set to win the sale, with the expectation that renewals will be lower.
Not every high first-year rate is a teaser, but the pattern is recognizable: a cap well above competitors, a long surrender period, and a carrier with no published renewal history. The illustration shows the teaser for every year, which the rules allow as long as it is the current rate.
Watch for
Compare the first-year cap to the carrier’s renewal caps on older contracts. If the gap is large, price the product at the renewal cap, not the teaser.
Related: Renewal caps and participation rates · Rate history · First-year bonus · Illustrated rate
How do I know if a carrier treats existing customers fairly?
DefinitionRate history is the record of the caps, participation rates and declared rates a carrier has actually set on in-force contracts at renewal, year by year.
Some carriers publish it; most will provide it on request for a specific product. Compare the first-year rate at issue to each renewal. A carrier whose 10% caps renew at 9%, 8.5%, 8% in a falling-rate period behaved reasonably. One whose 10% caps renew at 4% did not.
Watch for
History is the best evidence available, not a guarantee. Ownership changes, especially a sale to a new parent, can change renewal behavior. See Private equity-owned carriers.
Related: Renewal caps and participation rates · First-year teaser rates · Product track record · Private equity-owned carriers
What is an accumulation FIA?
DefinitionAn accumulation FIA is designed to grow account value, with the highest caps and participation rates the carrier can offer and no income rider attached.
With no rider fee and no benefit base, the whole Options budget goes into crediting rates. Terms are often 5 to 7 years. It competes with a MYGA for safe-money growth, offering a chance at more in exchange for a chance at zero in a given year.
Watch for
Adding an income rider to an accumulation FIA later is usually not allowed. Decide the job first.
Related: Income FIA · Hybrid FIA · FIA vs MYGA · Cap rate
What is an income FIA?
DefinitionAn income FIA is built around a guaranteed lifetime income rider; its crediting rates are secondary and often lower, because the carrier’s pricing goes into the roll-up and payout guarantees.
Buyers of an income FIA should evaluate the Payout percentage at their planned start age and the Rider fee, and treat the caps as a bonus. The account value matters mainly as the death benefit and the money that pays the fee. See Income rider vs SPIA for the alternative.
Related: Accumulation FIA · Income rider · Payout percentage · The roll-up headline trap · Income rider vs SPIA
Can one FIA do both growth and income?
DefinitionA hybrid FIA offers competitive crediting rates with an optional income rider, so it can be used for accumulation now and income later, usually with a middle-of-the-road result on both.
The rider is elective, often for a fee of about 1%, and can sometimes be added within the first several years. The caps are below an Accumulation FIA and the payout rates below a dedicated Income FIA. For a buyer who does not yet know whether they will need income, the flexibility can be worth the compromise.
Watch for
“Both” usually means “neither, fully.” If you know the job, buy the product built for it.
Related: Accumulation FIA · Income FIA · Income rider · Rider fee
An FIA illustration is a regulated document with specific required columns. Here is what each one is allowed to show and what it cannot tell you.
Where does the rate on the illustration come from?
DefinitionThe illustrated rate is the non-guaranteed interest rate an FIA illustration assumes for future years, derived from applying today’s caps and participation rates to the index’s actual history under the NAIC illustration rules.
Under NAIC Model 245, the carrier must apply the current (not improved) caps and participation rates to three ten-year historical periods: the most recent ten calendar years, and the best and worst ten-year stretches of the last twenty. The resulting geometric average rates are what the illustration projects forward. See Historical lookback.
Watch for
The illustrated rate assumes today’s cap for every future year. A carrier that cuts renewal caps makes every illustrated number wrong in the same direction.
Related: Historical lookback · Non-guaranteed column · Renewal caps and participation rates · AG 49-A illustration limits
What does “most recent ten years” mean on an illustration?
DefinitionA historical lookback applies the contract’s current crediting terms to the index’s actual past returns over defined periods to produce the illustration’s non-guaranteed values.
NAIC Model 245 requires three scenarios for a fixed index annuity: the most recent ten calendar years, the ten-year period out of the last twenty with the lowest index growth, and the one with the highest. An index must have existed for ten calendar years before it can be illustrated at all. The geometric mean credited rate is shown for each.
Watch for
The last ten years may have been unusually good or bad for the index. Look at the low scenario first; it is the closest thing the illustration has to a stress test.
Related: Illustrated rate · Back-tested index data · Non-guaranteed column · AG 49-A illustration limits
Which column on the illustration can I rely on?
DefinitionThe guaranteed column shows contract values assuming the minimum guaranteed caps, rates and fees and the worst allowed index outcome; it is the only column the carrier is contractually bound to.
On most FIAs the guaranteed column shows the Guaranteed minimum surrender value growing at the Nonforfeiture rate, which is why it looks dismal. It is not a prediction; it is a floor. On an income rider, the guaranteed column shows the roll-up and payout, which are usually guaranteed and therefore real.
Watch for
If the guaranteed income column meets your need, the product works even if everything else disappoints. If only the non-guaranteed column meets it, you are buying a hope.
Related: Non-guaranteed column · Guaranteed vs non-guaranteed elements · Guaranteed minimum surrender value · Illustration
Why are there two or three non-guaranteed columns?
DefinitionThe non-guaranteed columns show projected values under the illustrated historical scenarios, assuming current caps and rates continue; they are permitted projections, not promises.
The columns correspond to the lookback scenarios: most recent ten years, the low ten-year period, and the high. Reading the low and high together gives a range; the most recent column is the one sales conversations gravitate to.
Watch for
The spread between the low and high columns is the honest measure of how uncertain the product’s result is. A product whose columns are far apart is a product whose outcome depends on luck.
Related: Guaranteed column · Illustrated rate · Historical lookback
What is AG 49-A and does it limit my annuity illustration?
DefinitionActuarial Guideline 49-A is an NAIC guideline that limits illustrated crediting rates on indexed universal life insurance; fixed index annuity illustrations are instead governed by the NAIC Annuity Disclosure Model Regulation (#245).
The two are often confused because both concern indexed products. AG 49-A caps the illustrated rate on indexed life policies using a long historical average of the S&P 500 with a benchmark cap. Model 245, Section 6, is the FIA rule: three ten-year historical scenarios, current non-guaranteed elements only, no illustration of an index younger than ten calendar years. The tree for this reference lists AG 49-A; the entry is kept so the question has an answer.
Watch for
Whichever rule applies, illustration limits constrain the paper, not the product. A compliant illustration can still show a cap the carrier intends to cut.
Related: Historical lookback · Illustrated rate · Back-tested index data · NAIC
Three comparisons that come up on almost every call.
FIA or MYGA: which should I pick for safe money?
DefinitionA MYGA pays a known rate for a known term; an FIA pays an unknown rate between 0% and its cap each year; over a full term the FIA may earn more or less, and the MYGA will earn exactly what it said.
A rough rule: an FIA with a 9% cap has, in many historical periods, averaged somewhere near a strong MYGA rate, with far more variance. If you would be unhappy with two zero years in a row, the MYGA is the better fit.
Watch for
The comparison changes with the rate environment. When MYGA rates are high, the FIA’s edge shrinks. Compare both on the day you buy, not from a chart made in a different year.
Related: MYGA · Fixed index annuity · Cap rate · Accumulation FIA · Guaranteed rate
What is the difference between an FIA and a RILA?
DefinitionAn FIA floors every term at 0% and limits upside with a cap or participation rate; a RILA accepts some index loss through a buffer or floor in exchange for a higher cap, and is a registered security.
A RILA with a 10% buffer and a 15% cap will absorb the first 10% of an index loss and pass the rest to you; the FIA passes none. In exchange the RILA’s cap is meaningfully higher, often half again to nearly double an FIA cap on the same index. A RILA requires a securities-licensed seller and comes with a Prospectus. MAS focuses on fixed products; see Why MAS focuses on fixed products.
Watch for
The RILA’s higher cap is paid for with your principal in a bad year. If losing 15% in a year would change your plans, the FIA is the right tool. See Buffer and RILA floor.
Related: RILA · Buffer · RILA floor · 0% floor · Why MAS focuses on fixed products
Why not just buy an S&P 500 index fund?
DefinitionAn index fund gives you the full index return including dividends with full exposure to losses; an FIA gives you a capped share of the price index with no losses; they solve different problems and are not substitutes.
Over long periods the index fund has historically earned far more, because it keeps dividends and the whole upside. The FIA earns less and never has a down year. For money that must not shrink in the next 5 to 10 years, the FIA’s job is protection, and the fund cannot do that job. For money with a 20-year horizon that can ride out declines, the fund is the better growth tool.
Watch for
Any pitch that frames an FIA as “the market without the risk” is selling the fund’s return with the FIA’s safety, and no product delivers both. See No dividends.
Related: No dividends · S&P 500 · Insurance contract vs investment · When an annuity fits · When an annuity doesn’t fit
My Annuity Store is a licensed insurance agency. This reference is general education, not a recommendation for any product or carrier, and it is not tax or legal advice. Call 855-277-8088 or email info@myannuitystore.com with questions.
