Understanding fixed and indexed annuities
Two ways to protect savings and plan for income, and what to ask before you commit.
Fixed & Indexed Annuities
A contract built for the long term
An annuity is a contract with an insurance company that can grow over time and, if you choose, pay you income later.
What I explain
- Fixed annuities
- Fixed indexed annuities
- Income options
- Surrender periods and fees
Why people consider them
- Tax-deferred growth
- Options for income for life
- Passing to beneficiaries without probate
Why it matters
Fixed or fixed indexed?
Both protect your value from market losses. They differ in how interest is credited.
Fixed annuities
Earn a set interest rate, declared by the insurance company, for a stated number of years. You know the rate up front, and your value is not tied to the stock market.
Fixed indexed annuities
Credit interest based partly on a market index, within a cap or participation rate. You are not invested in the market directly, and interest already credited is typically locked in.
Caps and participation rates
They limit how much interest you can earn from an index, and insurers can change them over time.
Surrender charges
Withdrawals above the free amount during the surrender period carry a charge, so an annuity suits money you can leave in place.
Optional riders
Features such as income riders can add benefits for an added fee, which can reduce your value.
Why people add an annuity
Three reasons an annuity may fit a plan
01 Income for life
Savings can be turned into a personal pension that pays you every month in retirement, through annuitization or an optional income rider.
02 Tax-deferred growth
You do not pay taxes on earnings until you start taking withdrawals, so your money can grow without yearly taxes on its gains.
03 Legacy protection
Remaining funds can pass directly to the beneficiaries you name, without going through probate.
At a glance
Fixed and fixed indexed, side by side
| Feature | Fixed annuity | Fixed indexed annuity |
|---|---|---|
| How interest is credited | A set rate declared by the insurer for a stated period | Linked to a market index, within a cap or participation rate |
| When markets fall | Not linked to the market | Credited interest for the period is typically zero, not negative |
| Growth potential | Steady and predictable | Varies with the index; it can end up higher or lower than a fixed rate |
| Things to check | The rate guarantee period and the surrender schedule | Caps, participation rates, crediting method, rider fees and the surrender schedule |
Fixed annuities compared with fixed indexed annuities
How interest is credited
- Fixed annuity
- A set rate declared by the insurer for a stated period
- Fixed indexed annuity
- Linked to a market index, within a cap or participation rate
When markets fall
- Fixed annuity
- Not linked to the market
- Fixed indexed annuity
- Credited interest for the period is typically zero, not negative
Growth potential
- Fixed annuity
- Steady and predictable
- Fixed indexed annuity
- Varies with the index; it can end up higher or lower than a fixed rate
Things to check
- Fixed annuity
- The rate guarantee period and the surrender schedule
- Fixed indexed annuity
- Caps, participation rates, crediting method, rider fees and the surrender schedule
FAQs
Answers to questions I hear often. They explain how things work; your own situation is worth a conversation.
01.
How are annuity earnings taxed?
Earnings are generally not taxed until you withdraw them. Withdrawals are taxed as ordinary income, and withdrawals before age 59½ may face an additional federal tax.
02.
Can a fixed indexed annuity lose value?
Index losses do not reduce your value: when the index falls, credited interest for that period is typically zero. Fees for optional riders and surrender charges on early withdrawals can reduce it.
03.
What is a surrender period?
A set number of years during which withdrawals above a free amount carry a surrender charge. The charge usually steps down each year until it ends.
04.
What is an income rider?
An optional feature that can provide income for life, usually for an added yearly cost.
05.
Why does the insurer matter?
Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company, so it is worth knowing how strong the insurer is.
06.
What should I ask before I commit?
- How long is the surrender period, and what are the charges?
- How much can I withdraw each year without a charge?
- What are the cap and participation rates, and how can they change?
- Are there optional riders, and what do they cost?
- Might I need this money for something else in the next several years?
Talk it through with Karen
For one-on-one questions, a Complimentary Discovery Call is a good place to start.
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