Can I lose money in a fixed indexed annuity?
Your credited value is generally protected from index losses. However, surrender charges, market value adjustments or optional rider fees can reduce what you receive, especially if you withdraw early.
Guaranteed income and annuities
What Is a Fixed Indexed Annuity?
A fixed indexed annuity is a contract with an insurance company. Your money earns interest based partly on how a market index, such as the S&P 500, performs, up to limits set in the contract. You do not invest directly in the index, and in years the index falls, you generally receive no interest instead of a loss. Surrender charges usually apply to early withdrawals.
Written and reviewed by Dan Hopwood, Retirement Income Specialist · Retirement Income Knowledge Center · Last reviewed
How interest is credited
The insurance company tracks an index over a set period, often one year. If the index goes up, you are credited part of that gain. If it goes down, the credit is usually zero for that period, and interest already credited is generally locked in.
The share of the gain you receive is limited by features in the contract:
- Cap: the most interest you can be credited in a period.
- Participation rate: the percentage of the index gain used to figure your interest.
- Spread or fee: an amount subtracted from the index gain before interest is credited.
A simple crediting example
Illustrative one-year periods with a 7% cap
- Year 1: index gains 12%
- Credited 7% (cap)
- Year 2: index gains 4%
- Credited 4%
- Year 3: index loses 15%
- Credited 0%
Illustration only. Caps, participation rates and crediting methods vary by contract and can change at renewal. Index performance does not include dividends in many contracts.
Surrender charges and access to money
Most fixed indexed annuities have a surrender period that can last several years. Taking out more than the contract's free withdrawal amount during that time can trigger a surrender charge. Some contracts also have a market value adjustment. It is important to know how much you can access each year without a charge.
What a fixed indexed annuity is not
It is not a stock market investment, and it will not capture all of an index's gains. It is also not the same as a registered index-linked or variable annuity, which are securities and can lose value. A fixed indexed annuity is an insurance product regulated by state insurance departments, and its guarantees depend on the issuing insurer's financial strength and claims-paying ability.
How a fixed indexed annuity compares
| Feature | Fixed annuity | Fixed indexed annuity |
|---|---|---|
| Interest credited | Set rate | Linked to an index, with limits |
| Index losses | Not applicable | Floor, often 0%, protects credited value |
| Surrender charges | Usually yes | Usually yes |
Illustrative; features vary by contract and state.
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Common questions
Why would someone choose one?
People often look at them for protection from market losses, tax-deferred growth, and the option to add lifetime income. Whether one fits depends on your goals, timeline and need for access to money.
Are the caps guaranteed forever?
Usually not. Many contracts can change caps and participation rates at renewal, within minimums stated in the contract. Read the contract and disclosure carefully.
Is the interest taxable each year?
In a non-qualified annuity, growth is generally tax-deferred until withdrawn. Tax rules depend on your situation, so check with a qualified tax professional.
How is a fixed indexed annuity different from investing in the stock market?
A fixed indexed annuity is an insurance contract, not a stock market investment. Interest is credited based partly on how a market index performs, subject to limits such as caps or participation rates, and you do not own the index itself. Contract protections against index losses are subject to the claims-paying ability of the issuing insurer.
What happens if I need my money early from a fixed indexed annuity?
Most contracts allow some free withdrawals each year, often a percentage of the value. Taking out more during the surrender period usually triggers a surrender charge, and withdrawals may be taxable. Check the surrender schedule and free-withdrawal terms before buying.
What is a cap rate in a fixed indexed annuity?
A cap is the most interest the contract will credit for a period, even if the index rises more. For example, with a 6% cap an index gain of 10% would credit 6%. Insurers can usually reset caps after each term within limits stated in the contract.
What is a participation rate?
A participation rate is the share of the index gain used to figure your interest. With a 50% participation rate, an index gain of 8% would credit 4%, before any cap. Rates vary by contract and can change over time.
What is a spread or margin in an indexed annuity?
A spread is a percentage subtracted from the index gain before interest is credited. With a 2% spread, a 7% index gain would credit 5%. If the gain is smaller than the spread, the credit is usually zero.
What happens in a year the index is negative?
In most fixed indexed annuities, a negative index period credits zero interest rather than a loss to your account value. Fees for optional riders and withdrawals can still reduce the value. This floor is subject to the claims-paying ability of the issuing insurance company.
What is a market value adjustment?
A market value adjustment can raise or lower the amount you receive if you withdraw more than the free amount during the surrender period. It generally depends on how interest rates have moved since you bought the contract. Not every annuity has one, so check the contract.
Authoritative sources
This page is educational and general in nature. RetirementLeverage™ and Retirement Planning Store, Inc. do not provide individualized investment, securities, tax, or legal advice; please consult a qualified tax professional or attorney about your own situation. Insurance products and services may not be available in every state, and any guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.