Fixed vs. fixed indexed annuities: what you give up for what you get

Both of these are called “fixed” annuities. Both are insurance contracts. Both are regulated by state insurance departments. But they credit interest in different ways, and each one asks you to give up something different.

This article lays them side by side. We start with what each one costs you, then what each one offers.

Two quick definitions

A fixed annuity credits interest at a rate the insurance company sets and the contract states. Washington’s insurance regulator describes it this way: your money earns interest at a rate the insurer sets. Some fixed annuities lock in a rate for a set number of years. These are sometimes called multi-year guaranteed annuities, or MYGAs.

A fixed indexed annuity credits interest based partly on how a market index performs, such as a broad index of large U.S. company stocks. Washington’s regulator describes it as a minimum return plus a variable return tied to an index, with that variable part subject to participation rates, caps, charges and other limits. Your money is not placed in the index. The index is only used to calculate interest.

Both types are deferred annuities when you let interest build for years before taking income. Both usually let that interest grow tax-deferred, meaning you pay income tax when you take money out, not each year.

What both of them ask you to give up

Start here, because this part applies either way.

Access. Both types usually have a surrender charge, a fee for cancelling or taking out more than the contract allows during the first several years. Washington’s regulator says these are usually 5% to 10% of the amount taken out, for an average of about seven years.
Early tax cost. Taking taxable money out before age 59½ may bring a 10% additional IRS tax, on top of ordinary income tax. IRS Publication 575 covers this.
Market-level growth. Neither type is built to match the stock market’s best years.
Reliance on one company. The promises in either contract depend on the financial strength of the insurer that issues it.

If any of these is a deal-breaker, neither type fits. Our article on when an annuity is not right for you goes deeper.

Fixed annuity: what you give up

Upside. Your rate is your rate. If markets have a great year, your contract does not share in it.
Inflation protection. A set rate may not keep pace with rising prices over a long stretch.
Rate after the lock period. When a multi-year rate period ends, the new rate may be lower. Ask what the minimum renewal rate is.

Fixed annuity: what you get

Simplicity. You know the rate in advance. There is no formula to learn.
Predictability. You can see what your contract value will be at the end of the rate period, assuming no withdrawals beyond what the contract allows.
Easy comparison. Because the main term is a stated rate, it is simpler to compare one fixed contract with another.

Fixed indexed annuity: what you give up

Part of the index’s gains. Caps, participation rates and spreads limit how much interest you can earn in a good year. We explain each one in caps, participation rates and surrender charges, explained.
Predictability. You do not know your interest in advance. In a flat or down year for the index, you may be credited nothing.
Stable terms. The insurer can usually change caps, participation rates or spreads over time, within the minimums the contract states.
Simplicity. There are more moving parts: crediting methods, crediting periods, index choices, and sometimes optional features called riders that carry their own fees.

Fixed indexed annuity: what you get

A chance at more interest in good years than a fixed rate might pay, within the limits.
A floor. Typically, a down year for the index means zero interest for that period, not a loss of value already credited. Fees for riders and withdrawals beyond the free amount can still reduce your value.
Choices. Many contracts let you split money between a fixed-rate option and one or more index options.

A side-by-side summary

	Fixed annuity	Fixed indexed annuity
How interest is set	Rate stated by the insurer	Formula tied to an index, with limits
Know your interest in advance?	Yes, for the rate period	No
Share in index gains?	No	Partly, within caps, participation rates and spreads
Down year for the index	Not relevant; rate still credited	Typically zero interest for that period
Complexity	Lower	Higher
Surrender charges	Usually	Usually

Who each one tends to fit

These are general patterns, not recommendations.

A fixed annuity often fits someone who values a known rate and simple terms, and who has money they will not need during the surrender period.

A fixed indexed annuity often fits someone who wants some link to market performance, accepts that some years will credit nothing, and is willing to learn how the formula works.

Neither fits someone who may need the money soon, does not yet have an emergency fund, or wants full market growth.

Questions to ask about either type

What is the rate or crediting formula today, and what is the minimum the contract allows?
How long is the surrender period, and what is the charge in each year?
How much can I take out each year without a charge?
Is there a market value adjustment?
Are there riders, and what do they cost?
How long is my free look period?

The NAIC (National Association of Insurance Commissioners) publishes a free Buyer’s Guide for Deferred Annuities. Washington’s regulator also suggests comparing similar contracts from several companies and reading every disclosure before you buy.

How we help

We start with a written fact-find before we suggest anything. If an annuity makes sense, we show fixed and fixed indexed options side by side, with the limits spelled out, and we tell you how we are paid. If neither makes sense, we say so. Read more about how we work, or see our retirement income overview.

For questions about how withdrawals would be taxed in your situation, talk with a tax professional.