Fixed indexed annuities (FIAs) are a type of fixed annuity. As with all fixed annuities, fixed indexed annuities guarantee a minimum interest rate and provide for an income over a set period of time or the rest of your life. However, the fixed indexed annuity varies from the traditional fixed annuity in how interest is calculated and credited to the contract. Fixed indexed annuities offer the potential to earn more than the minimum guaranteed interest rate.
How does it work?
Interest credits in fixed indexed annuities are linked to an external index. An index measures how well the stock market, or part of the market, performs. The interest credited on your annuity will be determined by the calculation method used in the fixed indexed annuity and the performance of the index you choose. If the index performs positively or better than your guaranteed minimum interest rate, you’ll benefit by receiving more interest on your premium. If the index performs negatively or below your guaranteed minimum interest rate, the insurance company will still pay you the minimum rate, based on the terms of your contract.
You’ll elect which fixed indexed annuity product you want based on certain features and terms offered by the insurance company. Those features and terms can include: how long the contract is going to last, which index and calculation method your interest will be determined by, and how long you want to wait before the annuity pays out. After the given period of time, you’ll begin to receive payments.
Benefits and risks of fixed indexed annuities
A fixed indexed annuity can guarantee you a certain level of retirement income, but also allows you to benefit from potentially higher growth during the deferral period (the time period before income payments begin.) While your fixed indexed annuity has the ability to grow in value with interest that is calculated based on the movement of an external index, it contains less risk than a variable annuity because it maintains its minimum guaranteed contract value.
The way interest is calculated can vary greatly between insurance carriers and the individual fixed indexed annuity products offered. Make sure you understand how those calculations work based on your specific contract terms. There are also caps or limits on how much interest is credited—so no matter how well the external index may perform, your interest won’t reflect the full performance of the index. On the other hand, if the index decreases in value, you will not participate in the loss.
Fixed indexed annuity products can be more complex than fixed annuities, and it’s important that you get guidance from a licensed professional to decide if a fixed indexed annuity is right for your retirement income strategy.