What is a Fixed Index Annuity (FIA)?

December 30, 2017
Written by: Steven Gibbs | Last Updated on: April 4, 2023
Fact Checked by Jason Herring and Barry Brooksby (licensed insurance experts)

Insurance and Estates, a strategic life insurance provider composed of life insurance professionals, is committed to integrity in our editorial standards and transparency in how we receive compensation from our insurance partners.

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Fixed Index Annuity (FIA) Definition: A FIA is a tax-deferred financial tool that is designed to provide long-term growth and safety. In addition, the FIA is a retirement tool that can provide a guaranteed income for life.

There you have it, the basic definition of a Fixed Index Annuity which is a certain type within the broader definition of what is an annuity. But our simple definition of a fixed indexed annuity doesn’t really do it justice if you want to get into the finer nuances of this financial instrument.

Top 8 Features of a Fixed Index Annuity

In this article we’re going to talk about 8 different features of a FIA that make it unique and something to consider in your asset protection and wealth building plan.

A typical Annuity

Before digging into the specific features that make an FIA unique, it may be helpful to describe a typical annuity. A typical annuity is a contract between a financial company and an individual that has two phases – an accumulation phase, and an annuitization phase.

The first phase (accumulation) is a period of time in which the company accepts funds from the individual and attempts to grow those funds.

The second phase (annuitization) occurs when the individual chooses to annuitize — during this phase the company provides a regular stream of income for a pre-determined period of time.

There are a large variety of annuities, but in general they have the two phases mentioned above and a variety of options that can make them unique for the individual. There are also 2 broad classifications of annuities (applicable to all types) which are qualified annuities and non-qualified annuities.

This article is going to discuss the Fixed Index Annuity, and specifically we will show some features that make this financial product something that many people facing retirement should consider.

Tax Deferred Growth

The first key feature of a Fixed Index Annuity is that it grows tax deferred. This means that you will not be getting a 1099 on the growth of your account value each and every year. Instead your account grows tax deferred so it can grow unhindered.

This aspect is critical to the success of the account because compounding growth is so critical to success for retirement accounts.

Let’s look at a simple example:

Initial investment of $100,000 — invested for 30 years — at a 24% tax rate — assumed growth rate of 8%. The ending account balance for the taxed investment is $587,497, which seems pretty good. But wait! The tax deferred account has an ending balance of $1,006,266. That’s a difference of $418,769! But of course you have to pay taxes on the money you pull out. But remember, your account is now growing at around $75k per year, vs. just $44k per year for the taxed investment. Tax deferred can really help grow you account value!

Now of course the argument that you can’t get 8% annual returns consistently is completely valid. I only use this as an example of the potential difference if other elements are equal. It’s also true that we don’t know what taxes will be like in the future. But remember, the taxed investment has to pay taxes annually in the new tax environment as well, so the difference is still powerful.

Partial Market Gain without Market Loss

The Fixed Index Annuity is capable of growing your account value when the market is going up, without risking taking a loss in a down market. I know this sounds too good to be true, but it does actually exist.

How is this done? For those familiar with the insurance side of things, you may know that the FIA is credited much is the same way as an Indexed Universal Life (IUL). In other words, the FIA uses Options contracts to invest in the market.

Options allow for an individual to take advantage of a market direction. The two types of Options are Puts and Calls. Put options return favorably in a down market, and Call options return favorably when the market is up.

The premium from an FIA goes primarily into purchasing a portfolio of diversified bonds and other relatively safe investments. This allows for a steady growth in the account value of the FIA.

However, in order to get some of the upside of the markets a small portion of the premium goes toward purchasing a Call option. If the market goes up, the Call option returns a healthy portion of the up market. If the market goes down, the premium portion used to buy the Call option is forfeited, but because the majority of the premium was used in safe and traditional bonds, the overall account value remains steady.

No Annual Management Fees

A basic Fixed Index Annuity without any other bells and whistles will typically not have any annual management fees. It may seem odd, but remember that the company uses your money to make more money. They leverage your money. In return for allowing your money to be used, they give you a portion of the returns they make. So they don’t have to charge you a fee in order to make money.

A typical critique of the annuity is that the agent that helps you find the right company or product typically receives a commission on the sale. Whereas a typical investment advisor may charge much less up front, to manage your money.

However, keep in mind that these commissions are typically one and done — meaning that they only happen once and then that’s it.

AND, (and this is a huge deal), the commission paid to the agent is not paid by you, it is paid by the insurance company.

Let’s look at an example: You invest $100,000 in a Fixed Index Annuity. The agent will typically get a commission from the company, but after all is said and done, you still have an account value that is $100,000 when you start. No commission is subtracted.

NOTE: Fees with financial advisors can grow over time, if they take a percentage annually. As the value of the account goes up, their fee goes up. A 1% fee annually on your $100,000 doesn’t sound bad, but when you have an account value of $1,000,000, you may not be too happy with a $10,000 annual fee.

To be completely accurate, your account won’t be $100,000 at the beginning of most FIA policies. It will actually be more! Because of the DEPOSIT BONUS, which we’ll talk about next.

But I also want to mention that even though an FIA doesn’t typically charge an annual management fee, it will likely charge a surrender charge during the early years of the policy. This surrender charge typically decreases over time, and after the first year there is a Penalty Free Withdrawal (PFW) option.

Deposit Bonus

As mentioned above the account value of a typical FIA will not have the agent commission deducted. And to make things really exciting, a typical FIA offers a Deposit Bonus on the initial amount deposited. Most bonuses vary between 3 and 10 percent, but the bonus is not the only feature to look at.

As an example, if you manage to get an annuity with a 10% bonus, your $100,000 initial investment has a starting account value of $110,000, instead of just $100,000. For many that could be two years of annual returns in a mediocre market, so don’t dismiss the benefit of the Bonus.

Many companies offer the bonus option for multiple years. For example, the 10% bonus may be extended for the first seven years of the contract, which allows the owner the chance to get a 10% return every year for many consecutive years.

Great bonuses may come at the expense of some other feature, so make sure the bonus isn’t the only reason you decide to go with a specific company.

And always look over the annuity details with a qualified agent before choosing to buy, they can save you a good deal of research time, and potentially save some from making a decision they will come to regret.

Penalty-Free Withdrawals

Typically a company will allow you to withdraw 10% per year from your base account value. The first year is typically excluded but every year after that you are allowed to take withdrawals penalty-free up to the amount allowed (varies from state to state).

The penalty-free withdrawals exist for those emergencies that require additional funding.

However, even if you need money in excess of the 10% penalty-free limit, you can access it for a surrender charge that is very manageable.

Typically the surrender charge decreases with each year of your annuity, so by year 10 you can access the full-amount without paying a penalty. In year five the surrender charge may be 6% or more.

As an example, if you have a base account value of $100,000 and you want to withdraw $20,000 in year five of your annuity, you will be charged a surrender charge for the amount that is above the penalty-free withdrawal amount — in this case $10,000. A 6% surrender charge of $10,000 would be $600.

Nobody wants to pay fees and charges, but paying a few hundred dollars when an emergency arises is not going to set back your retirement goals in any major way.

And note, not all annuities are the same, so you will find insurance companies with longer surrender charge periods and variation in their penalty-free policies, just keep in mind that these options are available and can be useful if needed.

NOTE: Many companies will waive the surrender charge for withdrawals greater than 10% if they are Required Minimum Distributions (RMD) mandated by the IRS.

Guaranteed Income for Life

This is the aspect that most assume comes with an annuity. The Fixed Index Annuity does indeed provide for guaranteed income for life. This aspect is common to all annuities, but it is also something that is not mandatory. Let me explain.

An annuity is typically used for a stream of income that the owner cannot outlive. For example, a 65 year old male may purchase an annuity for $100,000 and get a lifetime monthly income of around $600.

This is typically called “annuitization” — the term given to describe when the contract goes from the accumulation phase to the annuitization phase. This is typically a no-return decision — you can’t undo it. And if the policy owner dies 3 months after annuitization, the company is no longer going to be sending the checks.

But not all annuities are created equal.

With many Fixed Index Annuities you have the option to maintain control for as long as you like. You can choose to access some of the money during the accumulation phase, or once the surrender charge period has ended you have complete access to all the money to do with as you please. You can choose to withdraw monthly from it without penalty for life. And upon death the full value (minus withdrawals) would go to your beneficiaries.

In addition, you can choose to convert, or annuitize the contract at any time. The monthly amount awarded for life will depend on your age and the amount of time you have remaining (if any) on the surrender period.

The point to remember in all this is that the choice is always yours. You do not have to annuitize if you don’t want to, it is not mandatory.

If you do choose to annuitize, you still have plenty of options. You can typically choose (1) lifetime income, (2) income for a specified period, (3) income for a specified amount, (4) life income with a period certain, or even (5) life income for both joint and survivor.

Fortunately you don’t have to decide up front, as your needs change and life happens, you can choose to act accordingly.

Locked In Credited Interest

Every year in your Fixed Index Annuity, your account value will be credited based on the index that you have chosen to participate in. This is called the Annual Reset provision and it allows the interest to be locked in each year and to be part of the account value in subsequent years that enjoys the credited interest.

This allows for the power of compounding interest each year without the fear of a negative (down) year.

In addition, the Annual Reset typically happens each year on your contract anniversary, which means that even in down years, you don’t have to wait for the market to climb out completely, instead you will see gains when the index climbs above the new original level at reset.

Once you have gains locked in, they are yours to keep. The fear of a down year killing your total account value goes out the window.

This type of financial product is not prone to the serious down years that impacted the 401k and other retirement vehicles that are fully exposed to market crashes like we saw in 2008.

Probate Avoidance

The final benefit of the Fixed Index Annuity that I want to mention, is that it may avoid probate. If you name a beneficiary to your contract, the beneficiary will either receive a lump sum upon your death, or they will receive a series of payments. And with certain riders, you may even be able to do this type of thing after you’ve started your lifetime income payments.

Probate means that your beneficiaries may spend months or even years trying to receive what is rightfully theirs.

Avoiding probate can mean that your heirs receive the money within weeks or days. If you have an annuity or are considering one, make sure you specify a beneficiary.


Fixed Index Annuities are one of the many retirement tools that we have at our disposal today.

The FIA benefits from potential market gains without risking serious market loss.

A Fixed Index Annuity typically offers a compelling annual deposit bonus for multiple initial years.

And FIAs are flexible enough to be converted into a lifetime stream of income at just about any time.

The annuity is not for everyone, but for those that need the safety and security that they offer, it may just be the perfect tool.

If you have questions about the Fixed Index Annuity, or you’d like to discuss your retirement options with an experienced professional, please contact us today.

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