What Is a Fixed Indexed Annuity?

A fixed indexed annuity, or FIA, is a contract between you and an insurance company. You give the company a lump sum of money. In return, the company credits interest to your account, and if you choose, can later pay you a steady stream of income for the rest of your life.

How the Interest Works

Unlike a savings account with a set interest rate, an FIA links what it credits you to the performance of a market index, most often the S&P 500. If the index goes up during the year, you earn a portion of that gain. If the index goes down, you do not lose money because of it. In the worst case, you simply earn no interest that year.

That said, the portion of the gain you actually receive is not unlimited. Insurance companies use something called caps, spreads, and participation rates to decide how much of the index's gain gets credited to you. That deserves its own explanation, so we cover it in a separate article.

Not the Same as Owning the Market

Your money in an FIA is never actually invested in the stock market. You are not buying shares of the S&P 500 or any other index. The index is only used as a measuring stick, a way for the insurance company to decide how much interest to credit you each year. That is the trade-off at the center of how an FIA works. You give up some of the upside you would get from being fully invested in the market, and in exchange, you are protected from losing money when the market falls.

Turning It Into Income

An FIA can simply grow over time, similar to an interest-bearing account. The insurance company also offers optional features called riders. Many people choose to add a rider for lifetime income, commonly called a Guaranteed Lifetime Withdrawal Benefit (GLWB). We call it the Pension Strategy. This feature guarantees you a set amount of income every year for the rest of your life, no matter how long you live or what the market does. Adding this Pension Strategy rider usually comes with an annual cost, and it typically works best when set up years before you plan to start taking income.

What This Article Does Not Cover

FIAs have a few more details worth understanding before you commit to one: what happens if you need your money early, how caps, spreads, and participation rates are actually set, how income payout rates are calculated, and the difference between your account's growth value and the separate value used to calculate guaranteed income. We are covering each of those in their own article so this introduction stays focused and easy to follow.

The Honest Trade-Off

An FIA is not designed to outperform the stock market in a strong year. It is designed to remove one specific risk, the risk of losing money when markets fall, especially in the years right before or after you retire. Whether that trade-off makes sense for you depends on your full financial picture, which is exactly what a conversation with a licensed professional is for.

This article is for educational purposes only and does not constitute financial, investment, tax, or legal advice. Product availability and features vary by insurance company and state. Licensed in Texas. TDI License #2266812.