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Annuities

Fixed vs. Fixed Indexed Annuities: What's the Difference?

By Brent De Paris ·
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Short answer: An annuity is a contract with an insurance company: you give it money, and it promises growth and/or income later. A fixed annuity pays a set, guaranteed interest rate. A fixed indexed annuity credits interest based on a market index, with a floor that protects your principal from index losses and a cap that limits the upside.

Fixed annuities

A fixed annuity works a lot like a CD from an insurance company. You lock in a guaranteed rate for a set term, often 3 to 10 years. A common version is the multi-year guaranteed annuity (MYGA).

Good for: people who want a predictable, guaranteed rate and don't need the money during the term.

Fixed indexed annuities

A fixed indexed annuity (FIA) ties your interest credits to an index like the S&P 500, using the same levers you see in IUL:

  • Floor: usually 0%, so a down year in the index doesn't reduce your credited balance
  • Cap or participation rate: limits how much of the index gain you receive

Your money is not invested directly in the market.

Good for: people who want more growth potential than a fixed rate, without exposure to market losses.

Income riders

Many FIAs offer an optional income rider that guarantees a stream of income for life, even if the account value runs out. These riders often have an annual fee and their own rules, so ask exactly how the income is calculated.

The trade-off: surrender charges

Annuities are built for long-term money. Most have a surrender period, often 5 to 10 years, during which taking out more than a set free-withdrawal amount (often 10% a year) triggers a charge. Withdrawals before age 59½ may also face a 10% federal tax penalty.

Questions to ask

  1. How long is the surrender period, and what are the charges each year?
  2. What is the guaranteed minimum rate?
  3. For an FIA, what are the current caps or participation rates, and can they change?
  4. Are there rider fees?
  5. How strong is the issuing insurance company?

Is an annuity right for you?

Annuities can be a strong fit for part of your retirement savings, especially money you want protected. They're usually not the right place for emergency savings.

Have a question before you call?

Start with Jarvis, a free AI concierge open to the general public, and get answers in plain English. You can ask how surrender periods and income riders work, on your own time, right from your phone. When you're ready, a licensed Moving Mountains advisor takes it from there. Prefer a person right away? Call (813) 739-9877.

Frequently asked questions

What is the difference between a fixed and a fixed indexed annuity?+
A fixed annuity pays a guaranteed set rate. A fixed indexed annuity credits interest based on a market index, with a floor that protects against index losses and a cap on gains.
Can I lose money in a fixed indexed annuity?+
Index declines don't reduce your credited balance, but surrender charges and rider fees can reduce what you receive if you withdraw early.
What is a surrender charge?+
A fee for withdrawing more than the allowed amount during the surrender period, which often lasts 5 to 10 years.
What is a MYGA?+
A multi-year guaranteed annuity is a type of fixed annuity that locks in one interest rate for the full term.
Brent De Paris headshot

Brent De Paris

Licensed Insurance Agent (License 215). President of Moving Mountains Advisors, a boutique independent agency serving Florida and beyond.

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This article is for general education only and is not investment, tax or legal advice. Annuity guarantees are backed by the claims-paying ability of the issuing insurance company. Surrender charges may apply to early withdrawals, and withdrawals before age 59½ may be subject to a 10% federal tax penalty. Features vary by carrier, product and state. Talk with a licensed agent and your tax professional before making a decision. Moving Mountains Advisors, licensed insurance agents. Call (813) 739-9877.