Fixed Index Annuity FAQs: Quick Answers to Your Questions
Fixed index annuities have a wide range of options that vary by product: crediting type, guaranteed lifetime income options, premium bonuses, guaranteed rollups, surrender charges, and more.
It's no wonder it's one of the more confusing types of annuities, perhaps only eclipsed by variable annuities in complexity. To help with understanding the intricacies of fixed index annuities, check out this list of frequently asked questions.
FAQ Sections:
Rates and Performance
What is the crediting method of a fixed index annuity?
Your crediting method is how the insurer determines your returns. There are a variety of crediting methods (cap rates, participation rates, spreads) which can be applied to a variety of market indices (e.g. S&P 500, Nasdaq-100). Your fixed index annuity tracks a market index, and based on the index's performance, your earnings are calculated using a crediting method.
How are earnings calculated with fixed index annuities?
A fixed index annuity generally tracks a market index (e.g. the S&P 500), and its earnings are based on its crediting method. There are several crediting methods: cap rates, participation rates, and spreads.
- Cap Rate: You earn up to a certain percentage of your index's returns, anything above this percentage is kept by the insurer. For example, if your cap rate is 8% and your index earns 10%, your earnings are 8%: 8% cap rate, 10% market returns, you earn 8%.
- Participation Rate: You earn a share of your index's returns. For example, if your participation rate is 80%, and your index goes up 10%, you earn 8%: 80% participation rate × 10% market returns = 8%.
- Spread Rate: The insurer has a spread rate they keep. For example, if the spread is 2%, and your index returns 10%, your earnings are 8%: 10% market returns − 2% spread = 8% earnings.
Fixed Index Annuity Rates
What market index can I choose for my fixed index annuity?
The index that your annuity can track is dependent on the product. While some products offer well known indices like the S&P 500, other indices may be lesser known and/or newer. Some products allow you to adjust your index mid-term and even allocate partial amounts in multiple indices. Different indices also often have different crediting rates.
Do fixed index annuities use simple or compound interest?
The vast majority of fixed index annuities credit your annuity with compound interest. This means that your annuity grows based on the full previous year's value, including any previously earned interest. Just check the product brochure or contact an expert to ensure your annuity earnings compound.
What is a premium bonus?
A premium bonus is a one-time, upfront bonus that's added to your annuity. These are normally a percentage bonus. For instance, if your bonus is 5%, and you purchase a $100,000 annuity, the insurer will credit your account with $5,000 when you purchase it. While this might seem like a great deal, products that offer premium bonuses often have lower rates or longer terms. Make sure you evaluate all aspects of a fixed index annuity instead of choosing one based on a one-time premium bonus.
What is a rollup on a fixed index annuity?
Some annuities offer guaranteed rollups. These are often very attractive sounding guaranteed rates (e.g. 8% annual guaranteed rollup). While this sounds like a great deal, the rollup is not applied to the cash value of your annuity. Instead, it is applied to the benefit value which is used to calculate your guaranteed income stream. It is not real money and has no cash value. It's only helpful if you want to turn your index annuity into an income stream, and even then, make sure you compare payout rates in addition to rollups.
Is my cap rate guaranteed for the whole term of the fixed index annuity?
This depends entirely on the product and options chosen. While some insurers have products that guarantee the cap rate for the whole surrender period (or term), many fixed index annuities allow for your cap rate to change periodically. In addition to this, if you reallocate your assets with some annuities, you can lose your cap rate guarantee.
General Information
How safe are fixed index annuities?
Fixed index annuities are contracts between you and an insurance company. The stability of your annuity depends on the financial stability of the insurer issuing the product. For that reason, we suggest you check out our insurance company ratings page. This page uses A.M. Best, Standard & Poor's, as well as Moody's ratings to evaluate the financial stability of an insurer.
Can a fixed index annuity provide guaranteed income?
Yes, many fixed index annuities have options to include an income rider with your contract. This allows you to turn your annuity into a guaranteed income stream at a future date. Generally speaking, when you turn on the income stream your annuity stops accumulating earnings and instead becomes solely an income vehicle. Additionally income riders often come with an annual fee, and income is paid out interest first.
Can I lose money with a fixed index annuity?
Most fixed index annuities have a rate floor of zero. This means that you cannot lose money just because your market index goes down. However, if you purchase an income rider (say at 1% per year) and your market index goes down, you will still be charged 1%. So effectively, an income rider fee can make your fixed index annuity lose value in down years.
What's the difference between a benefit value and accumulation value?
The benefit value of a fixed index annuity is a hypothetical value used to calculate your guaranteed income stream, if you choose to use one with your fixed index annuity. It's not real money and has no cash value; it's used for calculation (and frankly marketing) purposes only. Your accumulation value, on the other hand, is the actual cash value of your fixed index annuity. Accumulation and benefit values can be credited at different rates. Check our article that details different fixed index annuity rates.
Are other annuities better than fixed index annuities?
The answer to this depends on what your goals are. If you are looking for guaranteed lifetime income, you may be better off with an immediate annuity or deferred income annuity. However, these types of annuities are not as flexible as fixed index annuities.
If you want guaranteed, competitive returns, you should consider a multi-year guarantee annuity. These annuities grow at a guaranteed rate, which limits your upside potential, but increases your certainty.
Lastly, you might compare fixed index annuities and variable annuities. Generally speaking, variable annuities are much riskier and more expensive. We do not sell variable annuities.
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Accessing Your Money
Can I take money out of my fixed index annuity early?
Some fixed index annuities offer limited withdrawal options. For instance, you may be allowed to take up to 10% of your account value out starting in the second year. These allowances vary by contract, so make sure you understand your withdrawal allowances by reading the product brochure. If you take out more than you are allowed, you are often charged surrender penalties and assessed for a market value adjustment.
What is a guaranteed minimum surrender value?
Many deferred annuities, including fixed index annuities, have guaranteed minimum surrender values. This is the minimum amount that you can receive if you take all the money out of your annuity, regardless of surrender penalties and market value adjustments. For example, it could be 90% of your premium payment, less any previous partial withdrawals.
What is the surrender period or term of a fixed index annuity?
The surrender period, sometimes called "term", of your fixed index annuity is the amount of time you must keep it to avoid early withdrawal penalties. At the end of the surrender period, you can remove all of the money from the annuity penalty-free. It's important to note that some annuities allow for partial penalty-free withdrawals during the surrender period.
Taxes, Fees, and Death Benefits
What happens to my fixed index annuity if I die?
In most cases, you designate beneficiaries when you set up your fixed index annuity. If you die, the cash value of your annuity at the time of your death is distributed to your beneficiaries. While there are some variations based on the tax qualification of your annuity, your beneficiaries can receive their payout from the annuity over multiple years to help distribute their taxes owed. Learn more about beneficiaries here.
Do fixed index annuities have any fees or hidden costs?
Most fixed index annuities don't charge base fees for their products. However, if you choose to include an income rider, which allows you to turn your annuity into a guaranteed income stream, this rider often comes at a cost. Income riders are generally purchased when you set up the annuity and their cost is often an annual percentage cost, like 1% of your account value per year. Fixed index annuity commissions are generally paid directly by the insurer, meaning you do not pay a commission to the agent directly. Read more about annuity commissions here.
Are there tax benefits to a fixed index annuity?
There can be. Fixed index annuities generally grow tax-deferred, meaning that you don't pay taxes on your earnings each year that your money stays inside the annuity. This is only a benefit for non-qualified funds (read more about tax qualification here).
It's important to note that if you use an income rider, your income is paid out interest first. If you want to distribute your tax burden, you can employ an income annuity strategy. For more information, read our article on the taxation of fixed index annuities.
Need help with fixed index annuities?
Whether a fixed index annuity is right for you is a highly personal decision. We can help you wade through the details of index annuities, so you can make a confident, informed decision about them. Just call our U.S.-based annuity experts at (866) 866-1999. We have decades of experience, great customer reviews, and are happy to help.
References:
- Nuss, Ken. Are Bonus Annuities a Good Deal? Kiplinger, July 10, 2023
