Fixed Index Annuities Explained

For some people, it is not uncommon to be confused about how Fixed and Fixed Index Annuities work.  So, this will help and Fixed Index Annuities explained below:

What Is A Fixed Index Annuity

A Fixed Index Annuity (FIA), also referred to as an Equity Index Annuity (EIA), or Hybrid Annuity enables the owner to enjoy interest growth tied to stock market performance without incurring any loss of principal or earned interest gains because of stock market downturns.  Another way of looking at a Fixed Index Annuity is that it is like a savings account with an insurance company that combines the elements of safety found in a bank account with the earnings potential of stock market securities.  The unique feature of a Fixed Index Annuity is that it insulates your money from the risk of loss.

A Fixed Index Annuity earns interest based on the performance of an equity index or multiple equity indices.  For example, one of the most commonly used indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500).

How Does a Fixed Index Annuity Differ From a Traditional Fixed Annuity

The primary difference between a traditional Fixed Annuity and a Fixed Index Annuity is the way the interest you earn is calculated.  In a typical Fixed Annuity, the interest rate you earn is set at the beginning of the Annuity contract.  In most Fixed Annuities, this interest rate does not change throughout the term of the Annuity.

In a Fixed Index Annuity, you are paid interest based on a formula calculation that is tied to a stock index such as the S&P 500.  In a Fixed Index Annuity, it will allow you to share in a portion of the upside gain of a high performing stock market index.  A key component of the Fixed Index Annuity is that you are never burdened with the downside of the market, and once allocated to your account, your gains are locked-in and never lose value.

Keep in mind that your money in the Annuity is not actually invested in the market or in any individual stocks.  The Annuity only references the market index (usually the S&P 500) as a gauge of how to add earned interest.

Popular Features of Fixed Index Annuities

In a Fixed Index Annuity, the value of your Annuity is guaranteed to earn a minimum rate of interest. Many Fixed Index Annuity contracts guarantee the minimum value will never be less than 100% of the original premium you paid into the Annuity, plus a minimum interest guarantee (not including any withdrawals you make).  This feature ensures that the Fixed Index Annuity owner can participate in the gains of the market, but is protected against any losses in the stock market.  This makes Fixed Index Annuities a more attractive alternative than mutual funds to many risk-averse investors.

Further, many Fixed Index Annuities also pay a bonus on your premium deposit when you purchase your Annuity.  This bonus payment gives you an immediate gain in your Annuity value.

Finally, Fixed Index Annuities grow tax-deferred, which means instead of paying taxes on your earnings, 100% of your earnings remain contained within the account and continue to compound and earn more interest.

Learn more about how Fixed Index Annuities Calculate their interest rate.

Fixed Index Annuity Example

Here is an hypothetical example of how a Fixed Index Annuity may grow.