A fixed indexed annuity ties your growth to a market index while protecting a portion of your principal. Here is how that balance works.
A fixed indexed annuity, or FIA, is a fixed annuity product that offers an alternative way to calculate interest. Instead of a flat guaranteed rate, an FIA tracks a selected stock market index, such as the S&P 500 or the Dow Jones Industrial Average, and can earn interest tied to the performance of that index, typically on each contract anniversary.
What makes an FIA distinctive is the balance it tries to strike. It protects a portion of your principal, so if the market index goes down, the worst that can happen is that you earn zero interest for that year. If the index is higher on your contract anniversary, you receive a portion of the growth as indexed interest credits, subject to limits the company sets, called caps, spreads, or participation rates.
At its core, a fixed indexed annuity earns interest tied to a market index when it rises, protects your principal from loss when the index falls, and grows tax-deferred.
Here is how an FIA works, along with the advantages and the tradeoffs to keep in mind.
Your money is not invested directly in the market. Instead, the insurance company credits interest based on how the selected index performs over each contract year. When the index rises, you share in a portion of that gain, up to the limits set by caps, spreads, or participation rates. When the index falls, your principal is protected and you simply earn zero interest for that period rather than taking a loss.
When the index rises. You receive a portion of the growth as indexed interest credits, up to the limits the company sets, known as caps, spreads, or participation rates.
When the index falls. Your principal is protected and you earn zero interest for that period rather than taking a loss.
A fixed indexed annuity offers a few key advantages:
There are also tradeoffs to weigh:
A fixed indexed annuity may appeal to someone who wants some exposure to market-linked growth but is not comfortable risking principal in a downturn. It offers a middle path between the certainty of a fixed rate and the full risk and reward of the market.
A fixed indexed annuity trades some of the market's upside, through caps and participation rates, for protection against its downside. Understanding those limits, and the surrender period, is the key to knowing whether the balance fits your goals.
If you want to talk through how annuities work and whether one fits your situation, we’re happy to help. Consider scheduling a complimentary, no-obligation call. We can review your goals, walk through your income options, and figure out whether an annuity makes sense for you.
Can you lose money in a fixed indexed annuity?
A fixed indexed annuity protects a portion of your principal, so if the market index goes down, the worst that can happen is that you earn zero interest for that year rather than losing money to the market. Interest credits, however, are not guaranteed.
What are caps, spreads, and participation rates?
They are the limits an insurance company sets on how much of an index's gain you receive as indexed interest credits. When the index rises, you share in a portion of the growth up to those limits.
Is my money invested directly in the stock market?
No. A fixed indexed annuity tracks a selected index, such as the S&P 500 or the Dow Jones Industrial Average, and credits interest tied to its performance, but your money is not invested directly in the market.
How long is my money locked up in an FIA?
You are locked into the annuity for a set number of years, known as the surrender charge period, and you will incur penalties if you withdraw more than the contract allows during that time.
Annuities are long-term products designed for retirement income. All guarantees are backed by the financial strength and claims-paying ability of the issuing company. Annuities involve fees and charges, including possible surrender penalties. Withdrawals are generally subject to ordinary income tax, and a 10% federal penalty may apply if taken before age 59.5. Product and feature availability may vary by state. This material is for informational purposes only and is not intended as legal, tax, or investment advice. HiWire Financial offers insurance products and services.
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