Fixed and Fixed Index Annuities
You’ve Probably Heard Both Sides
You may have heard an annuity is the answer. You may have heard to stay away from them. An annuity is a contract, and whether it’s right for you depends on what that contract says and what you want the money to do. My job is to educate you on it, and the decision is yours.
What an Annuity Is
An annuity is a contract you make with an insurance company. You pay in, either a lump sum or over time. The money generally grows tax‑deferred, and the company can turn it into income later. I work with two kinds:
| Fixed annuity | Fixed index annuity | |
|---|---|---|
| How interest is set | A rate the insurance company declares | Based partly on a market index, such as the S&P 500 |
| What limits it | The declared rate, which can change after the first term | Caps, participation rates or spreads, which can change |
| In the market? | No | No. Your money isn’t invested in the index |
| How simple is it? | Simpler | More moving parts to understand |
Guaranteed Lifetime Income
Many annuities offer a way to take income for as long as you live, even if the account value runs out. Sometimes that’s part of the contract, and sometimes it’s an optional rider with a yearly fee. This is one I spend more time on with people, so it’s worth understanding the details: when income can start, how much it pays, what happens to it if you take out extra, and what’s left for your family.
What You Give Up
- Access. Surrender charges apply if you take out too much during the first several years.
- Some growth potential. Limits on interest mean you won’t get all of a good year in the market.
- Tax flexibility. Gains are taxed as income when you take them out, and withdrawals before age 59½ can bring an IRS penalty.
- Buying power. A level payment can buy less as prices rise.
An annuity also isn’t FDIC insured. Its guarantees depend on the financial strength and claims‑paying ability of the insurance company that issues it.
When It Isn’t a Good Fit
If you may need the money in the next few years, or you already have enough guaranteed income to cover your bills, you may not need an annuity at all. You’ll hear that from me if that’s what your situation shows.
Frequently Asked Questions
What is an annuity?
An annuity is a contract you make with an insurance company. You pay in, either a lump sum or over time. The money generally grows tax‑deferred, and the company can turn it into income later, including income for life if you choose that option. Guarantees depend on the financial strength and claims‑paying ability of the company. Most annuities charge you for taking out too much too early, so money you may need soon usually doesn't belong in one.
Learn how annuities work →What's the difference between a fixed annuity and a fixed index annuity?
A fixed annuity pays an interest rate the insurance company declares. A fixed index annuity credits interest based partly on how a market index does, such as the S&P 500, up to limits like caps and participation rates. Your money isn't invested in the index. With both, the company sets the terms, and the rate you start with may not be the rate you get later. A fixed annuity is simpler. An index annuity has more moving parts to understand.
Can you lose money in a fixed or fixed index annuity?
A market drop doesn't reduce your value directly in either one, as long as you follow the contract. You can still come out behind. Surrender charges apply if you take out too much too early, optional riders can charge fees that reduce your value, and early withdrawals can bring taxes and an IRS penalty. Any guarantee also depends on the claims‑paying ability of the insurance company.
How much does an annuity cost?
You choose how much to put in, and some fixed annuities have no separate annual fee. The costs show up in other places: surrender charges, fees for optional riders, and limits on how much interest you can earn. Before you sign anything, ask to see every one of these in writing. I'll go through them with you.
What is a surrender charge?
It's what the insurance company charges if you take out more than the contract allows during the first several years. The charge usually shrinks each year until it reaches zero. Many contracts let you take out a set amount each year without one. Before buying, find out how long the period lasts and what the charge is in each year. If you already own an annuity, those numbers are in your contract.
Are annuities a bad idea?
Some are a poor fit for some people. An annuity trades access and some growth potential for guarantees from an insurance company, which depend on that company's claims‑paying ability. If you don't need those guarantees, you may be better off without one, and I'll say so. What matters is whether the contract fits what you want this money to do.