01
Fund the contract
Deposit a lump sum (often $25,000 or more) or roll over an IRA, 401(k), or pension. Funds become principal-protected immediately.
What it is
A long-term contract with an insurance company that grows tax-deferred and protects principal from market losses.
A fixed index annuity (FIA) is a long-term contract with an insurance company. You deposit a lump sum or series of payments, and the insurer credits interest based on the performance of a market index, typically the S&P 500, within set limits.
The key feature is principal protection. In years when the index declines, your account does not lose value. In years when the index rises, your account earns interest up to a cap or participation rate set by the insurer. Gains compound tax-deferred until you withdraw them. At retirement, you can take regular withdrawals or convert the contract into guaranteed income for life through an option called annuitization.
How it works
The mechanics, in plain language.
02
Choose an index strategy
Pick from one or more crediting methods, for example annual point-to-point on the S&P 500. Strategies can be changed annually.
03
Account grows tax-deferred
Each year, the insurer credits interest based on index performance, capped on the upside and floored at 0% on the downside.
04
Withdraw or annuitize
At retirement, take systematic withdrawals or convert the balance into a guaranteed monthly income stream for a set number of years or for life.
Fit
Is this product right for you?
Likely a good fit
- People 50 and older planning for retirement income and principal protection
- Pre-retirees concerned about market downturns close to retirement
- Anyone wanting tax-deferred growth outside of an IRA or 401(k)
- Buyers willing to lock funds in for 5 to 10 years in exchange for protection and guaranteed income options
Probably not the right fit
- People who need ready access to their money; surrender charges apply to early withdrawals
- Young investors with long time horizons; index funds typically outperform FIA caps over decades
- Buyers seeking maximum upside; FIA caps limit gains
- Anyone unable to commit funds for the surrender period
Key terms
The vocabulary you'll hear.
- Surrender period
- The years during which withdrawing more than a small free-withdrawal amount triggers a penalty. Typically 5 to 10 years.
- Surrender charge
- A percentage fee on withdrawals above the free-withdrawal limit during the surrender period. Declines over time.
- Cap rate
- The maximum interest credited to your account in a given period, regardless of how high the index rises.
- Participation rate
- The percentage of the index gain credited to your account. A 60% participation rate means a 10% index gain credits 6%.
- Annuitization
- Converting the contract balance into a guaranteed stream of income, typically for life or a fixed number of years.
- Income rider
- An optional add-on that guarantees a minimum income amount regardless of account performance, typically for an annual fee.
FAQ
Common questions
Is my money invested in the stock market?
No. The insurer holds your funds and credits interest based on an index performance. You participate in gains within the cap and floor structure, but your principal is never directly exposed to market losses.
What if the insurance company fails?
Fixed index annuities are backed by state guaranty associations, which protect contract values up to limits that vary by state (typically $250,000 to $500,000). Buying from highly rated carriers (A or better by A.M. Best) further reduces this risk.
Can I lose money in an FIA?
Not from market declines; your principal is protected. You can, however, lose money to surrender charges if you withdraw too much during the surrender period. Rider fees and low caps can also reduce returns over time.
Are gains taxed every year?
No. Gains grow tax-deferred until you withdraw them. At withdrawal, gains are taxed as ordinary income. Withdrawals before age 59½ may incur a 10% IRS penalty.