Fixed Index Annuity Review

Shawn Plummer

CEO, The Annuity Expert

Fixed index annuities and equity index annuities are an increasingly popular investment vehicle. They offer people a way to earn a fixed income with some of the potential benefits of investing in stocks without many drawbacks, but they also come with risks and problems that can’t be ignored. This hybrid indexed annuity review is what you need to know about fixed indexed annuities before investing your money.

What is a Fixed Index Annuity?

A Fixed Index Annuity also known as an equity index annuity is an insurance policy for retirement. The tax-deferred retirement plan allows a consumer to earn interest based on a fixed interest rate or the positive performance of a stock market index such as the S&P 500 and Nasdaq without the risk of stock market losses. Fixed index annuity owners can’t lose money due to a stock market crash because their money is not directly invested in the stock market.

Example

Fixed Index Annuity Example

Fixed Index Annuity Pros and Cons

ProsConsTax-Deferred GrowthLong-Term ContractsPrincipal Protection From Stock Market CrashLimited Upside PotentialEarn Interest Based On Stock Market PerformanceComplicated Index StrategiesLock-In All Interest Earned (Never Lose Money)Surrender ChargesBetter Rates Than CDs and Fixed AnnuitiesTriple-Compounding InterestFewer FeesUnlimited Contribution LimitsFlexible Guaranteed Lifetime IncomeHedge Against Inflation

The Pros

  • Principal Protection: A fixed index annuity allows you to participate in positive stock market performance. Your account value is protected when the stock market goes down.
  • Taxes Are Deferred Until The Future: If you own a fixed deferred annuity, you won’t pay taxes on the interest each year. Instead, you will owe taxes when you withdraw the money from your fixed index annuity in the future.
  • Compounding Interest: Fixed index annuities usually have compounding interest.
  • Fewer Fees: In a fixed index annuity, annuity owners will pay a fraction of the fees paid in a variable annuity.
  • Lock-In Your Gains And Never Lose Them: You lock in the gains every time you earn interest. You never lose money that you have earned. This is called The Annual Reset Method.
  • Guaranteed Income For Life: An income rider offers a flexible retirement income stream that cannot be outlived. It is also known as a Guaranteed Lifetime Withdrawal Benefit (GLWB). Use our annuity calculator to get an estimate of how much it will cost you.
  • No Contribution Limits: You can put as much money into an indexed annuity as you want. That may be a good thing for older people trying to save more or who have maxed out their 401(k) and IRA contributions.

The Cons

  • Long Term Contracts: Fixed index annuity Contracts can range from 5 years to 16 years in length. The standard length tends to be a 10-year indexed annuity contract.
  • Limited Upside Potential: Typically, a fixed annuity will provide better growth than a traditional fixed annuity. In contrast, if you want to take the risk of losing some of your money by investing in stocks or bonds, then you should invest in a variable annuity.

Fixed Index Annuity Problems

Fixed Index Annuity Advice

Most fixed index annuities are great savings plans. However, finding the perfect annuity can be challenging. Utilizing an annuity expert is critical in selecting the right annuity.

Common Fixed Index Annuity Mistakes

  • Purchasing a FIA with little to no growth potential.
  • Purchasing a FIA for a “bell and whistle.”
  • Purchasing a FIA that does not generate the highest income for you.

Additional Reading

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Frequently Asked Questions

Can I lose money in an indexed annuity?

Indexed annuities are not investments or securities, and do not participate directly in the stock market. Rather, fixed index annuity interest is earned by the performance of an external index such as the S&P 500. The index is a “measuring stick” to determine how much interest can be earned in any given year. Index annuities are guaranteed not to lose money.

What are the advantages and disadvantages of an indexed annuity?

The advantages of indexed annuities include the potential to earn interest based on stock market performance without losing money. The disadvantages include limited upside potential compared to the actual stock market.

Are indexed annuities safe?

Indexed annuities are as safe as traditional fixed annuities or multi-year guaranteed annuities (MYGA) because they offer both a fixed interest rate each year or interest based on an external stock market index. Like a fixed annuity, fixed index annuities are guaranteed not to lose money.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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