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Fixed Index Annuity

Fixed index annuities (FIAs) can be a valuable addition to your income or retirement portfolio. Given the uncertainty and volatility in the stock market, the right fixed index annuity can help protect a contract owner’s principal from negative market fluctuations while offering the opportunity to earn interest based on the upside performance of a stock market index. A fixed index annuity offers a unique combination of benefits that can help contract owners achieve long-term retirement or income goals.

With a fixed index annuity, your principal and interest is guaranteed against stock market losses.1 While the annuity is not actually invested in the stock market, the interest paid in the contract each year is tied to the upside performance of a stock market index like the S&P 500® or the Dow Jones Industrial Average®. Most fixed index annuities have a maximum amount of interest you can earn in any one year, called a cap. If the index is positive for the year, interest is credited up to the cap or spread of the contract.  However, if the stock market index is negative in any one year, your principal is protected. The annuity’s value doesn’t go down and there is no loss of principal or loss of previously earned interest.  Any interest that is credited to your contract in one year can never be lost due to market declines in future years.


Some fixed index annuities set a maximum interest rate (or cap) that the contract can earn in a specified period. In an annual cap strategy, there is a declared annual maximum the contract can earn each year, which is referred to as the “cap.” For example, an index annuity with a 6 percent annual cap could potentially earn up to 6 percent each contract year. Let’s say the S&P 500® returned 7 percent in one contract year. Because the 7 percent met and exceeded the 6 percent cap, the contract holder would be credited 6 percent for the year. If the S&P 500® rose 4 percent the next year, the contract holder would earn 4 percent, because it is lower than the 6 percent cap.

Participation Rate

A participation rate determines what percentage of the index increase is used to calculate a contract’s credited interest. For example, if the insurance company sets the participation rate at 45 percent, your fixed index annuity will be credited with interest, based on 45 percent of any increase in the value of the stock market index. Let’s say the S&P 500® returned 10 percent in one contract year. The contract holder would be credited 45 percent of the 10 percent increase, which would equate to a 4.5 percent interest credit for the year. If the S&P 500® rose 20 percent the next year, the contract holder would earn 9 percent.

Fixed Index Annuity Performance

The chart below shows two lines. The red line is the price performance of the S&P 500® index going back to 1998. The blue line is the performance of a fixed index annuity with a 45 percent participation cap. Starting with $100,000 in 1998, after 18 years in the stock market, the stock account value grew to $231,454. The blue line, which is the fixed indexed annuity, saw no negative years over that time period and outperformed the stock market with an ending balance of $239,053.


Next Steps:

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The chart shows the value of the S&P 500® and a hypothetical index annuity based on an initial value of $100,000 including the actual historical data of the S&P 500® for the 18-year period from 1/1/1998 to 12/31/2016 without dividends. The value of the hypothetical index annuity is computed based upon the annual participation crediting method, with a participation rate of 45% and assumes no surrenders or withdrawals during the period shown and no rider charges. The S&P 500® value does not reflect brokerage fees, sales charges, management fees, or other investment costs that may be incurred to invest in an S&P 500® mutual fund or to purchase S&P 500® options. An annual cap may cause the interest credited to be less than the annual percentage increase in the S&P 500®. The annual participation rate cap of 45% is based upon a typical cap for index annuity contracts issued by insurance companies under the current rate environment. Rates and caps are subject to change. The blue line also shows the value of the annuity if the S&P 500® return was zero or negative and reflects that annuity value will never be less than the premium paid, assuming no surrenders or withdrawals during the period shown. This chart shows how the value of a hypothetical index annuity does not decrease when the S&P 500® declines. When the S&P 500® increases, the annuity value increases, subject to a crediting method, by credited interest based upon the positive S&P 500® change. When the S&P 500® decreases, the annuity value remains the same – the value of the initial premium as well as prior credited interest are protected, as long as there are no early surrenders or excess withdrawals. As shown in years 2000 - 2002, 2008 and 2011, the fixed index annuity didn’t lose any value even though in those years the S&P 500® price index declined or was flat in value. A fixed index annuity is not any investment in the stock market and does not directly invest in any stock index. Past performance is not an indicator of future success.
1 Any amount withdrawn from your contract may be subject to ordinary income tax and, if taken prior to age 59 1/2, a 10% federal tax penalty.

2 Guarantees and protections offered by fixed and fixed indexed annuities are subject to the claims-paying ability of the issuing insurance company.
There have been no promises, guarantees or warranties suggesting that any strategy will result in a profit or will not result in a loss.

We are an independent financial services firm helping individuals create growth and income strategies using a variety of insurance solutions to custom suit their needs and objectives.

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. None of the information contained on this website shall constitute an offer to sell or solicit any offer to buy a security or any insurance product.

*Any references to protection benefits or steady and reliable income streams on this website refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods, which vary by insurance company. Annuities are not FDIC insured.

The information and opinions contained in any of the material requested from this website are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only and are not a solicitation to buy or sell any of the products mentioned. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual's situation.