- A fixed indexed annuity credits interest linked to a market index (like the S&P 500) but never directly invests in the market — your principal is protected from losses when held to maturity.
- FIA returns are limited by caps, participation rates, or spreads — understanding these three crediting methods is essential before buying.
- Realistic long-term FIA returns average 4–7% across full market cycles, trading some upside for complete downside protection.
- Most traditional FIAs have no explicit annual fees; costs are embedded in the rates that limit your upside. Income riders add 0.50–1.25% per year.
- FIAs are best suited for conservative pre-retirees (50–70) who want more growth potential than a MYGA but cannot afford market losses.
- What Is a Fixed Indexed Annuity?
- How FIAs Work: The Mechanics
- FIA Crediting Methods Explained
- Real-World FIA Returns
- FIA Fees and Costs
- FIA vs. Other Products
- Common FIA Misconceptions
- Red Flags to Watch For
- Pros and Cons
- Who Should (and Shouldn’t) Buy an FIA
- How to Evaluate an FIA
- Frequently Asked Questions
What Is a Fixed Indexed Annuity?
A fixed indexed annuity (FIA) is a contract with an insurance company that credits interest based on the performance of a market index — most commonly the S&P 500 — while guaranteeing that your principal is protected from market losses when held to maturity. FIAs are sometimes called “equity-indexed annuities” or “indexed annuities,” though the insurance industry now favors the term “fixed indexed annuity” to emphasize the principal protection.
Here is the fundamental trade-off: in exchange for protecting your money from market downturns, the insurance company limits how much of the index’s gains are credited to your account. In a year when the S&P 500 rises 25%, your FIA might credit 8–12% depending on the crediting method. In a year when the S&P 500 drops 30%, your FIA credits zero — not negative 30%. Your account value never declines due to index performance.
This “participate in some of the upside, none of the downside” structure makes FIAs one of the most popular annuity types in the United States. According to LIMRA, fixed indexed annuity sales exceeded $120 billion in 2024 — a record year — driven by consumers seeking growth potential without the stomach-churning volatility of direct market exposure.
Important distinction: An FIA does not invest your money in the stock market. Your premium goes into the insurance company’s general account, which is primarily invested in investment-grade bonds. The market index is used only as a measuring stick to calculate how much interest to credit. You own no shares of stock, receive no dividends, and bear no direct market risk. This distinction matters for regulation, taxation, and risk — and it is the single most misunderstood aspect of FIAs.
How FIAs Work: The Mechanics
Understanding FIA mechanics requires grasping two core concepts: the floor and the crediting formula. Once you understand these, the product becomes straightforward.
The Floor: Your Downside Protection
Every FIA has a floor — the minimum interest rate that can be credited in any given period. For the vast majority of FIAs, the floor is 0%. This means that even if the linked index drops 40% in a year, your account is credited exactly 0% — your balance stays the same. The floor is the contractual guarantee that makes FIAs fundamentally different from variable annuities or direct market investments.
Some FIAs also offer a minimum guaranteed accumulation value — typically 87.5% of your premium compounding at 1–3% annually. This provides a backstop: even if the index credits 0% every single year for the life of the contract, you are guaranteed to receive at least this minimum value at maturity or annuitization.
The Annual Reset: Locking In Gains
Most FIAs use an annual reset (also called “annual ratchet”) mechanism. At the end of each crediting period (usually one year), any interest earned is permanently locked into your account value. The index starting point then resets to the current level for the next period. This is critically important because it means:
- Gains are permanent. Once interest is credited, it cannot be taken away by future market declines.
- Losses don’t carry forward. If the index drops 20% in year one and then rises 15% in year two, your FIA earns 0% in year one and credits a portion of the 15% gain in year two. You don’t need to “make up” the prior year’s loss before earning interest again.
This annual reset feature is one of the most powerful aspects of FIAs. In a volatile market that drops 30% and then recovers 35%, a direct stock market investor would still be slightly below their starting point. An FIA owner would have earned 0% in the down year and a portion of the 35% gain in the recovery year — ending ahead.
Year-by-Year Example
Consider a $100,000 FIA with an 8.5% cap rate, annual point-to-point crediting on the S&P 500, and a 0% floor. Here is how it might perform over five hypothetical years:
| Year | S&P 500 Return | FIA Credit (8.5% Cap) | FIA Account Value |
|---|---|---|---|
| 1 | +18.2% | +8.5% (capped) | $108,500 |
| 2 | −12.4% | 0.0% (floor) | $108,500 |
| 3 | +26.1% | +8.5% (capped) | $117,722 |
| 4 | +5.3% | +5.3% (below cap) | $123,961 |
| 5 | ∡8.7% | 0.0% (floor) | $123,961 |
In this hypothetical five-year period, the S&P 500 had a cumulative gain of roughly 27%. The FIA credited approximately 24% — capturing most of the upside while completely avoiding both down years. The key insight: FIAs don’t need to beat the market. They need to protect you from the bad years while giving you meaningful participation in the good years.
FIA Crediting Methods Explained
This is the most important section of this guide. The crediting method determines how much of the index gain reaches your account. There are three primary methods, and most FIAs offer at least two. Understanding the differences is essential to evaluating any FIA.
1. Cap Rate Method
A cap rate sets the maximum interest that can be credited in a single crediting period. If the index gains more than the cap, you receive the cap. If the index gains less than the cap, you receive the full gain.
Example: Your FIA has a 9% cap rate with annual point-to-point crediting on the S&P 500.
- S&P 500 gains 22% → You receive 9% (capped)
- S&P 500 gains 7% → You receive 7% (below cap, full credit)
- S&P 500 declines 15% → You receive 0% (floor)
Best in: Moderate growth years (when index gains are near or below the cap). In strong bull markets, you leave the most upside on the table.
Typical range: 5–12% for annual point-to-point on the S&P 500, depending on the carrier, current interest rate environment, and whether the product charges an explicit fee.
2. Participation Rate Method
A participation rate determines the percentage of the index gain that is credited to your account. There is no hard ceiling like a cap — the credit scales proportionally with the index gain.
Example: Your FIA has a 55% participation rate with annual point-to-point crediting.
- S&P 500 gains 20% → You receive 11% (55% × 20%)
- S&P 500 gains 10% → You receive 5.5% (55% × 10%)
- S&P 500 declines 25% → You receive 0% (floor)
Best in: Strong bull markets, where the proportional credit continues to grow with larger index gains (unlike the cap method, which stops at the ceiling).
Typical range: 25–60% for the S&P 500 on traditional (no-fee) FIAs. Fee-based FIAs may offer 80–150%+ participation rates. Some alternative indices (e.g., volatility-controlled indices) offer 100–200% participation rates, but with built-in volatility buffers that dampen the underlying index returns.
3. Spread (Margin) Method
A spread (also called a “margin” or “asset fee”) is a fixed percentage that is subtracted from the index gain before the remaining amount is credited. If the index gain is less than the spread, you receive 0%.
Example: Your FIA has a 2.5% spread with annual point-to-point crediting.
- S&P 500 gains 14% → You receive 11.5% (14% − 2.5%)
- S&P 500 gains 3% → You receive 0.5% (3% − 2.5%)
- S&P 500 gains 1% → You receive 0% (1% is less than the 2.5% spread, so floor applies)
- S&P 500 declines 10% → You receive 0% (floor)
Best in: Very strong bull markets, where the fixed deduction becomes a smaller percentage of a large gain. A spread of 2.5% on a 25% index gain means you keep 22.5% — far more than most cap rates would allow.
Typical range: 1.5–4% spread, often combined with no cap on the upside (or a very high cap).
Crediting Methods Compared
| Method | How It Works | Best Market For | Typical Range | Upside Limit |
|---|---|---|---|---|
| Cap Rate | Max % credited per period | Moderate gains (5–10%) | 5–12% | Hard ceiling at cap |
| Participation Rate | % of index gain credited | Strong bull markets (15%+) | 25–60% (no-fee); 80–150%+ (fee-based) | Scales with gains, no hard cap |
| Spread/Margin | Index gain minus fixed % | Very strong gains (20%+) | 1.5–4% deducted | No cap (or very high cap) |
| Annual Reset | Index resets each year | Volatile/recovery markets | Applied to all methods | Gains locked; losses don’t carry |
| Point-to-Point | Start vs. end of period | Steady upward trends | 1-year or 2-year terms | Depends on method used |
Which Method Is Best?
There is no single “best” method. The optimal choice depends on market conditions that no one can predict:
- Cap rate performs best in moderate, consistent growth years (the most common scenario historically).
- Participation rate performs best in strong bull markets and provides more proportional upside.
- Spread performs best in very strong years but can credit zero in modest-gain years when the index barely exceeds the spread.
Many FIAs allow you to allocate across multiple crediting methods within the same contract — for example, putting 50% of your premium in a cap-rate strategy and 50% in a participation-rate strategy. This diversification smooths out the variation across different market environments. Your financial professional can help you determine the right allocation based on your goals and time horizon.
Point-to-Point vs. Other Measurement Periods
The point-to-point method is the most common measurement approach. It compares the index value at the start of the crediting period to the value at the end. Most FIAs use annual point-to-point, measuring the index at the contract anniversary date each year.
Some FIAs offer monthly averaging (the average of 12 monthly index values is compared to the starting value) or monthly point-to-point with a cap (each month is credited separately with its own cap, then summed). Monthly strategies tend to produce lower but more consistent returns. Annual point-to-point is generally preferred by advisors because it captures the full annual movement of the index.
Real-World FIA Returns
One of the most important questions prospective FIA buyers ask is: “What will I actually earn?” The honest answer requires context.
Historical Return Analysis
Multiple independent studies have analyzed FIA performance over full market cycles. The consensus from these analyses suggests:
- Average annual returns of 4–7% over 10–20 year periods, depending on crediting method, cap rates at the time of purchase, and market conditions.
- Outperformance vs. bonds and CDs in most market cycles, thanks to the equity linkage.
- Underperformance vs. the S&P 500 total return in prolonged bull markets, due to caps and participation limits.
- Significant outperformance vs. the S&P 500 during periods that include major downturns (2000–2002, 2008–2009, 2020, 2022), because the 0% floor avoided devastating losses.
The Power of Avoiding Losses
Consider two investors, each starting with $100,000 in 2000:
- Investor A holds the S&P 500 index (without dividends). After the 2000–2002 bear market and 2008–2009 financial crisis, Investor A’s portfolio experienced two drawdowns exceeding 40%. Even with strong recoveries, the sequence of losses significantly impacted long-term compounding.
- Investor B holds an FIA with an 8% cap rate. Investor B earned 0% during every down year and received capped gains during up years. Investor B avoided the devastating compounding effect of large losses and maintained a more consistent growth trajectory.
The mathematical reality is powerful: a 50% loss requires a 100% gain just to break even. By never experiencing the loss in the first place, FIA owners avoid this “recovery gap” entirely. This is why FIAs can produce competitive long-term outcomes despite capturing only a portion of the upside.
What Affects Your Actual Returns
Your personal FIA returns will depend on several factors:
- When you buy. Cap rates and participation rates are influenced by interest rates at the time of purchase. Higher interest rate environments (like 2024–2026) generally produce higher caps and participation rates.
- Which crediting method you choose. Cap, participation, or spread — each performs differently in different market environments.
- Whether rates are adjusted. Most FIA caps and participation rates can be adjusted annually by the carrier (subject to contractual minimums). A carrier might offer a 9% cap today but adjust it to 7% next year if interest rates decline.
- The index you select. The S&P 500 is the most common, but many FIAs now offer alternative indices (Bloomberg, PIMCO, BlackRock-designed) with different risk/return profiles.
- How long you hold. FIAs are designed for 5–15+ year holding periods. The longer the holding period, the more market cycles you capture, and the more the 0% floor works in your favor.
FIA Fees and Costs
The FIA fee structure is one of the most commonly misunderstood aspects of the product. Here is a clear breakdown:
Traditional (No-Fee) FIAs
Most traditional FIAs charge no explicit annual fee. There is no management fee, no administrative fee, and no mortality and expense charge deducted from your account. The insurance company earns its margin through the caps, participation rates, and spreads that limit your credited interest — the “cost” is what you don’t earn, not what is deducted from your balance.
This implicit cost structure is fundamentally different from variable annuities (which deduct 2–3%+ annually) and means your full account balance compounds each year without any fee drag. For a $200,000 FIA held for 10 years, the difference between 0% explicit fees and 2.5% annual fees (typical of a variable annuity) amounts to approximately $40,000–$60,000 in preserved value.
Fee-Based FIAs
A newer category of FIAs charges an explicit annual fee — typically 0.50–1.50% of account value — in exchange for significantly higher caps and participation rates. These products are designed primarily for fee-only financial advisors who charge advisory fees and want higher crediting potential for their clients.
The trade-off is straightforward: you pay a visible annual fee, but the insurance company can offer a much higher cap (often 12–15%+) or participation rate (80–150%+) because the fee offsets their hedging costs. Whether a fee-based FIA outperforms a traditional no-fee FIA depends entirely on market conditions. In strong bull markets, the higher caps tend to more than offset the fee. In flat or modest markets, the fee drag can erode returns.
Income Riders
An income rider (also called a “guaranteed lifetime withdrawal benefit” or GLWB) is an optional add-on that guarantees a minimum lifetime income stream from the FIA, regardless of how the index performs. Income riders typically cost 0.50–1.25% annually charged against the account value.
The rider creates a separate “income benefit base” that grows at a guaranteed rate (often 5–8% simple or compounded) during a deferral period. When you activate income, you receive a guaranteed percentage of the income benefit base each year for life. The income benefit base is not a cash value — it cannot be withdrawn as a lump sum. It is a calculation base used solely to determine your guaranteed income payments.
Income riders make sense if your primary goal is guaranteed lifetime income starting at a future date. If your goal is pure accumulation and you don’t need the income guarantee, the rider fee reduces your net return unnecessarily.
Surrender Charges
All FIAs impose surrender charges if you withdraw more than the free-withdrawal allowance (typically 10% of account value per year) during the surrender period. Surrender periods commonly range from 5 to 12 years, with charges starting at 8–10% in year one and declining to 0% at the end of the period.
Longer surrender periods generally correspond to higher cap rates and participation rates — the carrier can offer more generous crediting terms because they have a longer investment horizon for your premium. Consider the surrender schedule carefully against your liquidity needs. Once the surrender period ends, you can access 100% of your money with no penalty.
Total Cost Comparison
| Cost Component | Traditional FIA | Fee-Based FIA | Variable Annuity |
|---|---|---|---|
| Annual management fee | None | 0.50–1.50% | 1.00–1.50% |
| M&E charge | None | None | 1.00–1.50% |
| Administrative fee | None | None | 0.10–0.15% |
| Implicit cost (caps/spreads) | Yes (embedded) | Lower (offset by fee) | N/A |
| Income rider (optional) | 0.50–1.25% | 0.50–1.25% | 0.50–1.50% |
| Surrender charges | 5–12 years declining | 5–12 years declining | 5–8 years declining |
| Typical total annual cost | 0–1.25% | 0.50–2.75% | 2.50–3.50%+ |
FIA vs. Other Products
Understanding where an FIA fits relative to other retirement savings products helps clarify whether it belongs in your plan. Here is a direct comparison:
| Feature | Fixed Indexed Annuity | Fixed/MYGA | Variable Annuity | S&P 500 Index Fund |
|---|---|---|---|---|
| Growth potential | Moderate (4–7% avg.) | Fixed (3–6%) | High (market-dependent) | High (8–10% historical avg.) |
| Downside protection | 0% floor — no market losses | Full principal protection | None — account can lose value | None — full market risk |
| Annual fees | None (traditional) or 0.5–1.5% | None | 2–3%+ | 0.03–0.20% |
| Tax treatment | Tax-deferred | Tax-deferred | Tax-deferred | Taxed annually on dividends/gains |
| Guaranteed income option | Yes (rider or annuitize) | Yes (annuitize) | Yes (rider or annuitize) | No |
| Complexity | Moderate | Very simple | High | Very simple |
| Liquidity | Limited (surrender period) | Limited (surrender period) | Limited (surrender period) | Full — sell any time |
| Best for | Growth + protection (50–70) | Safe savings (any age) | Max growth + guarantees | Long-term accumulation (30–50) |
FIA vs. Fixed/MYGA: A MYGA gives you a guaranteed fixed rate (currently 5.0–5.7% for top A-rated products) with zero complexity. An FIA gives you the potential for higher returns through index linking but with more complexity and no guarantee of earning above 0% in any given year. If you prioritize simplicity and predictability, a MYGA is likely the better choice. If you want the possibility of capturing market upside without market risk, an FIA offers that potential.
FIA vs. Variable Annuity: A variable annuity invests your money directly in market-based subaccounts — your balance goes up and down with the market. Annual fees are typically 2–3%+, significantly higher than an FIA. Variable annuities offer higher growth potential but also real risk of loss. The FIA eliminates market risk at the cost of capping your upside.
FIA vs. Direct Market Investment: An S&P 500 index fund has the lowest fees (0.03–0.20%), no surrender charges, and full liquidity. Over very long periods (20–30 years), the stock market has historically outperformed FIAs. However, the stock market also delivers the highest volatility — including 30–50% declines that can devastate retirement portfolios, especially in the first few years of retirement (sequence-of-returns risk). An FIA solves this specific problem.
Common FIA Misconceptions
FIAs are among the most misunderstood financial products on the market. Here are the most common misconceptions — and the facts.
“FIAs invest in the stock market.”
FALSE. This is the most pervasive misconception. Your FIA premium goes into the insurance company’s general account, which holds primarily investment-grade bonds. The S&P 500 (or other index) is used only as a formula to calculate your interest credit. You own no shares of stock, receive no dividends, and have no direct exposure to market losses. An FIA is an insurance product, not a security. It is regulated by state insurance departments, not the SEC.
“You can lose money in an FIA.”
FALSE — if held to maturity. The 0% floor guarantees that your account value never declines due to index performance. However, there are scenarios where you could receive less than your original deposit:
- Early surrender: Withdrawing more than the free-withdrawal allowance during the surrender period triggers surrender charges that could reduce your balance below your premium.
- Fee-based FIAs: Some products that charge an explicit annual fee deduct it from account value even when index credits are 0%, which can erode principal.
- Carrier insolvency: All guarantees depend on the insurance company’s financial strength and claims-paying ability. If the carrier fails, guarantees may not be fully honored. This is why choosing carriers with strong A.M. Best ratings (A- or better) is essential.
For a traditional (no-fee) FIA held to maturity with a financially strong carrier, loss of principal from index performance is not possible.
“The cap rate is the most you’ll ever earn.”
PARTIALLY TRUE. A cap rate limits the credit in a single crediting period — typically one year. But many FIAs offer multiple crediting strategies within the same contract. You might have a cap-rate strategy with an 8.5% cap and a participation-rate strategy with 50% participation and a spread strategy with a 2% spread. The participation and spread methods have no hard cap. Additionally, over multi-year periods, the compounding of annual credits can produce total returns well above any single year’s cap.
“FIAs are too complex to understand.”
OVERSTATED. The core mechanics are simple: your money earns interest linked to an index, your gains are capped or proportional, and your floor is 0%. The complexity comes from the variety of crediting options, optional riders, and contract provisions. A competent financial professional should be able to explain how your specific FIA works in 10 minutes. If they cannot, or if the product requires a 40-page illustration to justify, consider simpler alternatives like a MYGA.
“FIAs always underperform the stock market.”
FALSE. Over cherry-picked bull market periods, yes — the S&P 500 will outperform any FIA. But across full market cycles that include at least one significant downturn, FIAs have historically delivered competitive returns. The 2000–2012 period is a prime example: the S&P 500 delivered a total return of approximately 24% over 12 years (with dividends), while many FIAs produced cumulative returns in the 40–60% range by avoiding the 2000–2002 and 2008–2009 crashes entirely.
“Insurance agents push FIAs because they earn higher commissions.”
PARTIALLY TRUE — but context matters. FIAs do typically pay higher commissions than MYGAs or SPIAs (often 4–7% of premium vs. 1–3%). However, commission alone does not make a product inappropriate. The relevant question is whether the FIA is suitable for your specific financial situation, goals, and risk tolerance. State suitability regulations require that any annuity recommendation must be in the consumer’s best interest. If an agent recommends an FIA to someone who needs simplicity and predictability, that’s a suitability concern. If they recommend it to someone who wants growth potential with downside protection, that can be entirely appropriate.
Red Flags to Watch For
The vast majority of FIA sales are legitimate and appropriate. But like any financial product, FIAs can be mis-sold. Here are the warning signs:
Unrealistic return projections. If an agent shows you an illustration projecting 10–15% annual returns from an FIA, they are using best-case scenarios that are unlikely to materialize consistently. Realistic long-term averages are 4–7%. Any projection that looks better than the stock market’s historical average (roughly 10% including dividends) should be questioned aggressively.
Failure to explain how the cap or participation rate can change. Most FIA crediting rates can be adjusted annually by the carrier (subject to a contractual minimum, which is often very low — sometimes 1% or even 0%). A responsible agent will explain that today’s 9% cap might become a 6% cap next year. An irresponsible agent will present today’s cap as if it’s locked forever.
Glossing over surrender charges. A 10-year surrender period is a real commitment. If the agent minimizes the surrender schedule or says “you can get out any time,” they are not being transparent. Make sure you understand exactly how much it would cost to access your money in years 1 through 10.
Pressure to replace an existing annuity. “Replacement” proposals (surrendering an old annuity to buy a new one) require careful analysis. The new contract restarts the surrender clock, and the surrender charges on your existing contract may wipe out any advantage. State regulations require agents to compare both products in writing before a replacement is executed. If an agent pushes a replacement without a detailed cost comparison, that is a serious red flag.
Using retirement account money (IRA/401k) without tax discussion. FIAs inside an IRA provide no additional tax benefit — the IRA is already tax-deferred. The FIA only makes sense inside an IRA if you specifically want the downside protection and income guarantees. An agent who emphasizes the “tax-deferral benefit” of an FIA inside an IRA either doesn’t understand tax law or is being misleading.
Recommending an FIA to someone who needs liquidity. If you anticipate needing access to more than 10% of the funds within the next 5–10 years, an FIA is the wrong product. A responsible advisor will screen for liquidity needs before recommending any annuity.
Pros and Cons of Fixed Indexed Annuities
Every financial product involves trade-offs. Here is an honest assessment of what FIAs do well and where they fall short:
- Principal protection — 0% floor means your account value never declines due to market drops when held to maturity
- Market-linked growth potential — earn more than fixed-rate products in favorable market years
- Annual reset locks in gains — credited interest is permanently secured each year and cannot be lost in future downturns
- Tax-deferred growth — no annual taxes on credited interest until withdrawal
- No explicit annual fees (traditional FIAs) — your full balance compounds each year
- Guaranteed lifetime income option — income riders provide predictable retirement cash flow regardless of market conditions
- Multiple crediting methods — diversify within a single contract across cap, participation, and spread strategies
- Death benefit — named beneficiaries receive the full account value, typically bypassing probate
- Capped upside — caps, participation rates, and spreads limit how much of the market gain reaches your account
- Crediting rates can be adjusted — carriers may lower caps or participation rates annually (subject to contractual minimums)
- Surrender charges — limited liquidity during the surrender period (5–12 years), with charges of 5–10% in early years
- Complexity — multiple crediting methods, optional riders, and contract provisions require careful analysis
- Income rider fees erode returns — 0.50–1.25% annual charge reduces net credited interest
- Not FDIC insured — guarantees depend entirely on the issuing insurance company’s financial strength
- No dividends captured — FIA credits are based on index price return only, excluding the 1.5–2% annual dividend yield
- Earnings taxed as ordinary income — not at the lower long-term capital gains rate
Who Should (and Shouldn’t) Buy an FIA
An FIA May Be Right for You If:
You are 50–70 and approaching or in early retirement. This is the core FIA demographic. You have accumulated savings that need to grow, but you cannot afford a 30–40% market loss in the years just before or after you stop working. The sequence-of-returns risk is real, and FIAs specifically address it.
You want more growth than a MYGA but less risk than the stock market. If a guaranteed 5.5% (MYGA) feels too conservative and the stock market feels too risky, an FIA occupies the middle ground. You accept that some years will credit 0% in exchange for years that might credit 8–12%.
You need guaranteed lifetime income in the future. If your retirement plan has an income gap — a shortfall between Social Security, pensions, and your monthly expenses — an FIA with an income rider can fill that gap with guaranteed payments for life.
You have already maximized other tax-advantaged accounts. A non-qualified FIA allows unlimited tax-deferred contributions beyond your 401(k) and IRA limits.
You understand and accept the trade-offs. An FIA is appropriate only if you understand the crediting methods, fee structure, surrender schedule, and liquidity limitations — and you accept all of them.
An FIA Is Probably Not Right for You If:
You need liquidity within the next 5–10 years. Surrender charges make FIAs a poor choice for money you may need. Keep liquid reserves in savings accounts, money markets, or short-term CDs.
You want simplicity above all else. If the crediting methods and contract provisions feel overwhelming, a MYGA provides guaranteed growth with zero complexity. There is no shame in choosing the simpler product.
You are under 50 with a long time horizon. With 20+ years until retirement, a diversified portfolio of low-cost index funds has historically outperformed FIAs. The FIA’s downside protection is less valuable when you have decades to recover from market corrections.
You are chasing stock market returns. If you would be frustrated earning 6% in a year when the S&P 500 gained 25%, an FIA will disappoint you. FIAs are designed for people who value consistency over maximum return.
Someone is pressuring you to buy one. A legitimate FIA purchase is a considered, well-informed decision — never impulsive. High-pressure sales tactics, free dinner seminars, or urgency-based pitches (“rates are going down next week”) are red flags. Walk away.
How to Evaluate a Fixed Indexed Annuity
If you are considering an FIA, follow this six-step framework to evaluate any product you are shown:
Step 1: Define Your Goal
Are you buying the FIA primarily for accumulation (growing your money) or income (guaranteed retirement payments)? This determines whether you need an income rider, how much liquidity matters, and which crediting methods to prioritize. An accumulation-focused buyer should typically avoid paying for an income rider they don’t need. An income-focused buyer should evaluate the rider’s guaranteed income percentage and deferral bonus rate.
Step 2: Understand the Crediting Method
Ask these questions about every FIA presented to you:
- What crediting methods are available? (Cap, participation, spread, or combination?)
- What are the current rates for each method?
- What are the contractual minimum rates? (These are the guaranteed floors that the carrier can never go below.)
- How often can the carrier change the rates? (Usually annually.)
- Can I allocate across multiple strategies? How often can I reallocate?
Step 3: Compare the Floor and Guarantees
Verify: What is the minimum guaranteed interest rate (floor)? Most FIAs have a 0% floor, but confirm it. Also check the minimum guaranteed accumulation value — this is your backstop if the index credits 0% for the life of the contract. A typical minimum guarantee is 87.5% of premium compounding at 1–3%.
Step 4: Evaluate Fees and Surrender Charges
Get a complete fee disclosure in writing. Specifically:
- Does the FIA charge an explicit annual fee? (If fee-based, how much? Is it deducted from account value or from the credit?)
- What is the full surrender charge schedule, year by year?
- What is the free-withdrawal allowance? (Typically 10% per year.)
- If you are adding an income rider, what is the annual rider fee?
- Are there any other charges (market value adjustment, excess withdrawal charges)?
Step 5: Check the Carrier’s Financial Strength
Every FIA guarantee depends on the insurance company’s ability to pay claims. Verify the carrier’s ratings:
- A.M. Best: Look for A- (“Excellent”) or better.
- S&P Global: Look for A- or better.
- Moody’s: Look for A3 or better.
For an FIA with a 10-year surrender period, you are committing to this carrier for at least a decade. Financial strength matters more than a slightly higher cap rate from a lower-rated company.
Step 6: Model Realistic Scenarios
Ask your financial professional to show you how the FIA would have performed in at least three historical scenarios:
- 2003–2007 (bull market): How much upside would you have captured?
- 2007–2012 (crash and recovery): How did the 0% floor protect you?
- 2013–2023 (extended bull with corrections): What was the average annual return?
Historical backtests are not predictions of future performance, but they provide a realistic framework for setting expectations. Be wary of any illustration that only shows optimistic scenarios.