Fixed Index Annuities (FIAs)

A fixed index annuity is a safe, fixed annuity product (like a MYGA), but with market-linked growth. With FIAs, your principal is protected from market losses because your investment is not directly invested in the market. The insurer uses formulas to credit interest based on index performance. Most differences between FIAs come down to how the index-linked growth is structured.

Step 1: You contribute a lump-sum investment amount and select the length of your contract.

Step 2: You select the index you want your investment growth to be linked to, such as the S&P 500®.

Step 3: You decide on the crediting option that you want the insurance company to use to calculate the index-linked interest.

Step 4: Each year, regardless of the contract term selected, the rates are subject to annual renewal at the insurer's discretion, unless noted as a locked cap rate. You then need to reallocate your contract value or keep your allocations the same.

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Crediting Methods

With FIAs being market-linked versus a direct market investment, the insurance carrier sets some predefined rules to determine how much interest you'll gain based on index performance. The four most common crediting methods are cap rates, participation rates, performance-trigger rates, and spreads.

You may choose to allocate your entire purchase amount to one interest-crediting option or a combination of options. The amount of money you allocate to each one is up to you.

Cap Rates

The cap rate is the maximum interest rate that the annuity can earn during the (usually one-year) crediting period. For example, a 7% cap means you receive a maximum return of 7%, even if your index sees a growth of 10%. If the index performs below the cap rate, you receive the same rate as the index performance.

Participation Rates

The participation rate is the percentage of the index gain that is credited to the annuity's account value. For example, if the participation rate is set at 70% and the index increases by 10% during the (usually one-year) crediting period, the annuity will earn a return of 7% (70% of 10%). You receive 70% of the index’s increase.

Performance-Trigger Rates

A performance-triggered option credits your interest based on a defined rate, if the index is flat or positive. For example, if the rate is defined at 7% and the index increases by 10% during the (usually one-year) crediting period, the annuity will earn a return of 7%. Unlike cap rates, if the index performs below the defined performance-trigger rate, you still receive that same defined rate.

Spreads

A spread rate or margin is a set percentage that is deducted from the performance of an index before interest is credited. A higher spread rate will reduce the amount of credited interest. For example, a 7% spread means a 10% gain would be reduced to a 3% return.

With all four of these methods, if the index performance is zero or negative, interest will not be credited, but you will not have any loss of contract value.

Indexing Methods

In addition to a crediting method, a FIA also has an indexing method which determines how the insurance carrier measures the index performance before applying the cap rates, participation rates, performance-trigger rates, or spreads. These are usually set at one-year, which means that interest is credited annually based on the index return over one contract year. At the end of the contract year, you have the flexibility to reallocate your contract value however you choose or keep the same allocations. The most common measuring methods are point-to-point and monthly averaging.

Point-to-Point Method measures the index value at the beginning and end of a crediting period, which is usually one year. Only the starting and ending values matter, any fluctuations in between are disregarded.

Monthly Averaging Method measures the index value by averaging monthly values. Usually, the index value is recorded at the end of each month during a one-year period. The average of those 12 monthly values is then compared to the index value at the beginning of the period.

Understanding how FIAs operate within different market environments can help clarify where this product could fit within your retirement planning strategy.

Market Losses

When the market declines, your annuity is protected from those losses—you won't lose value due to negative index performance. This downside protection is a core feature of a FIA and can be especially valuable as you approach or enter retirement.

Moderate Market Growth

In periods of moderate market growth, your annuity will typically be credited with interest. The amount depends on the specific crediting and indexing methods selected.

Strong Market Growth

When the market experiences strong, double-digit growth, your annuity will still earn interest; however, the credited amount is limited. Because of the differing crediting methods available, you will only receive a portion of the market's gain rather than the full return.

Many fixed indexed annuities can also provide guaranteed lifetime income through optional income riders. While these riders add some complexity, they are often a key reason investors choose a FIA.

If you are considering a longevity or deferred income annuity (DIA) that would begin payments in three to seven years, a FIA may be worth evaluating as an alternative. In some cases, it can offer comparable or even higher income potential, while preserving greater flexibility and the possibility of leaving a benefit to beneficiaries for a longer period.

Our goal is to make it easy for customers to compare a curated list of FIAs in one place online. Here's what we've taken into consideration in choosing these FIAs: