Annuities Explained: Fixed vs Indexed
Life insurance protects your family if you die too soon. An annuity protects you if you live a long time. It's a contract with an insurance company: you hand over a sum of money (or a series of payments), and the company grows it and, if you choose, turns it into income you can't outlive.
Two phases of every annuity
Accumulation
Your money grows tax-deferred. You can't usually withdraw large amounts during the surrender period without a charge, though many allow 10 percent a year free.
Payout
You take withdrawals, or "annuitize" to turn the balance into guaranteed income for a set number of years or for life.
Fixed annuity
Works a lot like a CD from an insurance company. The insurer guarantees an interest rate for a set period, often 3 to 10 years. Many are called MYGAs (multi-year guaranteed annuities). Predictable and simple.
Fixed indexed annuity (FIA)
Your interest is linked to a market index, such as the S&P 500, with a cap or participation rate on gains and a floor (usually 0%) on losses. Your principal isn't exposed to market losses. Many FIAs offer optional income riders that guarantee a lifetime withdrawal amount.
| Fixed (MYGA) | Fixed indexed | |
|---|---|---|
| Growth | Guaranteed declared rate | Index-linked, with cap and floor |
| Market loss risk | None | None to principal |
| Upside | Known in advance | Higher potential, not guaranteed |
| Complexity | Low | Moderate to high |
| Lifetime income rider | Rare | Common (often for a fee) |
| Surrender period | Usually 3–10 years | Usually 5–10+ years |
| Good for | Safe, predictable growth | Growth potential plus income planning |
Variable annuities, which invest directly in the market and can lose value, are a separate product sold by securities-licensed professionals. They aren't covered here.
What to understand before you buy
- Surrender charges. Withdraw more than the free amount early and you'll pay a charge, often starting around 7 to 10 percent and declining each year.
- Taxes. Gains are taxed as ordinary income when withdrawn. Withdrawals before age 59½ may also face a 10% IRS penalty.
- Rider fees. Income riders on FIAs often cost around 1 percent per year.
- Caps can change after the first contract year on many indexed annuities.
- Liquidity. Annuities are for long-term money, not your emergency fund.
Common reasons people choose an annuity
- Moving CD money for a better guaranteed rate
- Protecting a portion of retirement savings from market drops
- Creating a guaranteed paycheck to cover basic bills alongside Social Security
- Rolling over a 401(k) from a former employer
- Leaving any remaining balance to beneficiaries
Annuity or life insurance?
If your main worry is your family's finances when you die, life insurance is the tool. If your main worry is running out of money while you're alive, an annuity is the tool. Many retirement plans use both. For using life insurance itself as an income source, see life insurance for retirement income.
Corebridge Financial and Transamerica, among others, offer a range of fixed and fixed indexed annuities. Rates and caps change often, so current quotes matter more than last year's brochure.
Turn savings into income you can count on
We can compare current fixed and indexed annuity rates and show what guaranteed income a given amount could produce for you.
This guide is general education, not tax, legal or financial advice. Product features, issue ages and prices vary by carrier and state and change over time.