How Does An Indexed Annuity Differ From a Fixed Annuity?

Shawn Plummer

CEO, The Annuity Expert

Do you have an annuity? If not, are you thinking about getting one? Annuities can be a great way to save for retirement and provide you with a stream of income once you retire. But there are different types of annuities available, so it’s essential to understand the difference between indexed and fixed annuities. This guide will discuss the critical differences between these two types of annuities. We will also help you decide which type of annuity is right for you!

The Difference Between Indexed Annuities and Fixed Annuities

An indexed annuity is a type of fixed annuity that is used for retirement income. The interest rate on an indexed annuity can be changed based on the performance of a stock market index (such as the S&P 500 or Nasdaq ), a fixed interest rate, or both. Fixed annuities have rates set at contract time and do not change unless there are changes in law or other factors outside the control of either party.

Both Fixed and Fixed Indexed Annuities Are Insurance Policies, Not Investments

Unlike a variable annuity, fixed and fixed indexed annuities are not investment products but insurance policies designed to protect your retirement savings. Fixed products are not invested in the stock market and can not lose money in a stock market crash.

Fixed Annuity

Similar to a CD or a bond, a fixed annuity is an insurance policy for retirement that will give you a guaranteed interest rate for a certain period. Fixed annuities offer a guaranteed rate of return that you will know before making the purchase.

Fixed Annuity Advantages

Fixed Annuity Disadvantage

  • Interest Rates Are Low
  • Can Not Keep Up For Inflation
  • Limited Liquidity
  • Surrender Charges
  • The Interest Rate Renews At A Unknown Rate After The Term Is Complete
  • Lifetime Income Is Distributed Through Annuitization

Fixed Indexed Annuity

An index annuity, also known as a fixed index annuity or an indexed annuity, pays a fixed rate of return based on a specific financial market’s performance, a fixed interest rate, or a fixed rate of return combination of both.

A fixed annuity offers one guaranteed rate only. An indexed annuity offers investors the potential to participate in some of the upsides of the stock market and a fixed rate declared annually. If the chosen stock market index performs well, you’ll make money. If the markets lose money, you’ll receive a fixed rate of return or zero interest and no loss of your original investment.

How A Fixed Indexed Annuity Earns Interest

  • You purchase an indexed annuity that utilizes the S&P 500 to earn interest.
  • The index annuity offers an 80% participation rate. Your investment can only participate in 80% of the S&P 500’s returns.
  • If the S&P returns 10% for the year, you’ll receive an 8% return on your annuity.
  • If the S&P returns a total of 0% for the year, you’ll receive an 0% return on your investment, but you won’t lose any money simultaneously.

Fixed Indexed Annuity Advantages

Fixed Indexed Annuity Disadvantages

  • Limited Upside Potential For Growth
  • Unknow Rates Of Return
  • Limited Liquidity
  • Surrender Charges

Fixed Annuity Vs. Index Annuity: Which Is Best?

When it comes to annuities, there are many options, and it can be hard to choose the right one. However, when it comes to fixed index annuities vs. traditional fixed annuities, there is a clear winner – the fixed index annuity.

  • Fixed index annuities offer the best of both worlds – the option for a fixed interest rate or to earn interest based on the performance of an external index.
  • Plus, they come with lifetime income riders to guarantee an income for life without giving up control over your money.
  • Index annuities can also help keep up with inflation, whereas fixed annuities cannot and assist with long-term care.

Overall, you can retire more comfortably with a fixed index annuity than a traditional one.

Split Annuity concept

When it comes to investing for the future, several strategies can lead to success. One recent approach that has gained popularity is splitting your investment into a fixed annuity and a fixed index annuity. By diversifying your portfolio this way, you can minimize your risk while still having the potential to earn higher returns over the long term.

  • With a fixed annuity, you will receive a guaranteed rate of return, which can provide peace of mind during volatile market conditions.
  • Meanwhile, a fixed index annuity offers the opportunity for higher returns based on the stock market’s performance.

By investing in both types of annuities, you can balance your risk and potentially earn greater returns than if you had invested solely in one.

How Does A Fixed Annuity Differ From A Fixed Index Annuity?  Combining A Fixed Annuity With A Fixed Index Annuity Could Lead To Higher Returns.

Next Steps

If you are looking for a fixed annuity with the potential to earn more interest, an indexed annuity may be a good option. Don’t hesitate to contact us for a quote; we would be happy to discuss your individual needs. We appreciate your time today and hope that this information was helpful. Thank you for reading!

The Difference Between Indexed Annuities And Fixed Annuities

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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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