Annuities
Fixed index annuities: some of the upside, none of the index losses
A fixed index annuity credits interest based on how a market index such as the S&P 500 performs. When the index rises, you're credited part of the gain. When it falls, you're credited zero, and the drop doesn't reduce your balance.
How interest is credited
Your money isn't invested in the stock market. The insurer tracks an index over a crediting period, usually one year. At the end of the period, it compares where the index started and ended, then applies your contract's terms:
- Cap: the most you can be credited for the period. With an 8% cap, a 12% index gain credits 8%.
- Participation rate: the share of the index gain you're credited. At 50% participation, a 10% gain credits 5%.
- Spread: a percentage subtracted from the gain. With a 2% spread, a 9% gain credits 7%.
- Floor: the least you can be credited, usually 0%. A losing year credits nothing and takes nothing away.
Interest credited in a good year is locked in. A later down year can't take it back.
A worked example
Here's how $100,000 would be credited over four years with an 8% annual cap and no other limits.
| Year | Index change | Credited | Balance at year end |
|---|---|---|---|
| 1 | +12% | 8.00% | $108,000 |
| 2 | +5% | 5.00% | $113,400 |
| 3 | −15% | 0.00% | $113,400 |
| 4 | +20% | 8.00% | $122,472 |
The surrender period
Most fixed index annuities have a surrender period of 5 to 10 years. During that time you can usually take out about 10% a year without a charge. Withdrawals above that pay a surrender charge that steps down each year. Many contracts waive the charge for a nursing home stay or a terminal illness. After the surrender period ends, your money is fully available.
Income riders
Many fixed index annuities offer an optional lifetime income rider for an annual fee. It lets you withdraw a set percentage every year for life, even if your account value runs out. The income annuities page compares this with an income annuity.
Who it tends to fit
- You're within about 10 years of retirement and a big market drop would change your plans.
- You want more growth potential than a fixed rate, and you accept a cap on the upside in exchange for no index losses.
- You won't need more than about 10% a year from this money during the surrender period.
It's a poor fit if you want full market returns, or if you may need the whole amount within a few years.