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Indexed Annuities

An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. You buy an annuity either with a single payment or a series of payments called premiums.

Some annuity contracts provide a way to save for retirement. Others can turn your savings into a stream of retirement income. Still others do both. If you use an annuity as a savings vehicle and the insurance company delays your pay-out to the future, you have a deferred annuity. If you use the annuity to create a source of retirement income and your payments start right away, you have an immediate annuity. 

Annuities come in a few varieties: fixed, variable and indexed. This article explains indexed annuities.

What is an Indexed Annuity?

Indexed annuities—also known as "equity-indexed annuities" or "fixed-indexed annuities"—are complex financial instruments that have characteristics of both fixed and variable annuities. Indexed annuities offer a minimum guaranteed interest rate combined with an interest rate linked to a market index, hence the name. 

Many  indexed annuities are based on broad, well-known indices like the S&P 500 Composite Stock Price Index. But some use other indexes, including those that represent other segments of the market. Some indexed annuities allow investors to select one or more indexes. Because of the guaranteed interest rate, indexed annuities give you more risk (but more potential return) than a fixed annuity, but less risk (and less potential return) than a variable annuity.

Things to Consider

A sales representative may describe an indexed annuity as a simple and easy-to-understand product. However, FINRA has warned that indexed annuities can be quite complex. One of the most confusing features of an indexed annuity is the method used to calculate the gain in the index to which the annuity is linked. There are several indexing methods firms use to calculate gains. The method used for your annuity matters because it will impact the calculation of the amount of interest to be credited to the contract based on the change in the index. Because of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one indexed annuity to another.

You also may hear that an indexed annuity product provides market-like returns with no risk and no loss on your investment. Indexed annuities offer protection on downside risk with a guaranteed minimum return, typically at least 87.5 percent of the premium paid at 1 to 3 percent interest. However, if you don’t receive any index-linked interest—in other words, if the index linked to your annuity declines—you actually can lose money on your investment. And, if you surrender your annuity early, you may have to pay a significant surrender charge along with a 10 percent tax penalty that will reduce or eliminate any return.

Before purchasing an indexed annuity, make sure you not only understand each feature, but also how the features work together, because this combination can have a significant impact on your return. You should also understand any fees or expenses that come with a particular product. Indexed annuities can be expensive and have been known to have substantial surrender charges if you surrender the policy early, and you may incur a tax penalty that could reduce or eliminate any return. Be prepared to ask your insurance agent, broker, financial planner or other financial professional specific questions to determine whether an indexed annuity is right for you. 


Indexed annuities are regulated by state law. If you have questions about a particular product, contact your state insurance commissioner. You can also check out whether the person selling an indexed annuity is registered with FINRA. Check FINRA BrokerCheck or call our hotline at (800) 289-9999.

More Information

The following resources provide additional information about indexed annuities, their risks and benefits, and whether this type of investment is the right choice for you.