What is a Fixed Index Annuity (FIA)?

What is a Fixed Index Annuity (FIA)?

A fixed index annuity is a contract with an insurance company that enables a person to save tax-deferred money now in exchange for future income payments, generally after retiring. The account interest and subsequent income payments are based on an underlying stock market index, such as the S&P 500, during a set period called the index term. With FIAs, your principal or premium amount is guaranteed. FIAs are regulated by the Security Exchange Commission and follow guidelines established by the National Association of Insurance Commissioners (NAIC).  

How does a fixed index annuity (FIA) work?

Investing in a fixed index annuity gives you the financial security of knowing that the principal you invest in an FIA is guaranteed. Unlike stocks, this protects your investment against a downturn in the market. How can insurance companies provide this kind of protection? Insurance companies reinvest your money over an extended period and use caps and participation rates to protect their investment.

A cap is the highest percentage of interest you can gain on your investment, no matter how the index fund performs. A participation rate is a percentage of the potential interest you earn on your investment. The insurance company determines the participation rate. It is based on the total gains of the index fund used.

Your contract with the insurance company will have a guaranteed minimum interest rate that is fixed over the investment period. The longer your investment period, the higher the rate is likely to be.

After a certain period, you can begin withdrawing an income stream from your FIA. The amount you withdraw depends on how long you want the payments to last. The percentage eligible for withdrawal is based on the accumulation value of your FIA, which is the premium plus the interest minus any withdrawals, surrender charges, unpaid riders, or unpaid loans.

Riders are extra benefits that you may purchase with your annuity. One option is a guaranteed income rider that is adjusted for inflammation.

What are the potential benefits of a fixed index annuity?

Fixed index annuities don’t lose money, which is a highly desirable benefit as you reach retirement age. If you are no longer working, you may be uncomfortable with the thought that 100% of your investment portfolio is at the mercy of the market.

When you invest your principal in a fixed index annuity, your investment is protected. At the end of the term, any gains are locked in and reinvested for the next investment term. The value of your FIA can only increase or remain the same. It cannot decrease. Principal protection makes FIAs a fairly conservative investment option.

An FIA can also be used to generate an income stream. It is a way for people to generate an income that is guaranteed for a specific period or over a lifetime.

The interest earned on your FIA grows tax free. It is only taxed when the money is withdrawn.

What are the potential drawbacks of a fixed index annuity?

Since FIAs are established for a specific period, they lack the flexibility of some other financial instruments used to accumulate money. If you sell an annuity or withdraw money from your annuity before the annuity matures, you will be charged a surrender penalty.

Caps and participation rates limit the earning potential of an FIA when compared with a comparable index fund in a favorable market. Fees to manage an FIA will also cut into your potential investment gains. The participation rates, caps, and crediting methods insurance companies use can change on the renewal date.


FIAs have a floor and won’t go below that amount, giving many people a sense of investment security. They follow an index, but do not directly participate in the stock market. Caps, participation rates, and potential fees limit FIA investment earnings. FIAs offer a wide range of contract terms and rates, so it is essential to talk with a financial professional to ensure that an FIA is the best option for your retirement planning.

There is no one-size-fits-all guide to investment. Working with a wealth manager who uses a fee-only financial planning structure can ensure you make the best financial decisions for yourself and your loved ones.

Gabriel Katzner

In 2002, Gabriel Katzner, received his Juris Doctorate with honors from the Fordham University School of Law. After spending the first 7 years of his legal career practicing at Cahill Gordon & Reindel LLP, an international law firm based in New York, he went on to found his own firm.
Building on his legal background, Gabriel’s vision emerged during his tenure at Katzner Law Group, where he excelled in estate planning, forming deep client connections. Recognizing the fleeting nature of traditional estate planning and the lack of comprehensive financial guidance, Gabriel conceived Frame Wealth Management. His commitment to lifelong client partnerships drove him to earn credentials as a CERTIFIED FINANCIAL PLANNER™ and CPWA® professional.

Frame Wealth Management, Gabriel Katzner

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