Fixed Indexed Annuities Pros and Cons [Plus a Review of the Top FIA Companies]

February 1, 2023
Written by: Steven Gibbs | Last Updated on: May 11, 2024
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.

Self Banking Blueprint

Free eBook!

The Self Banking Blueprint 2020 Cover Update V3

What are Fixed Index Annuities and How Do They Work?

Fixed indexed annuities, aka equity indexed annuities are a type of fixed annuity, but they have a bit more to offer. For instance, these flexible financial vehicles provide the opportunity for upside market-linked growth, while at the same time keeping principal protected from market downturns during the “accumulation” period.

Some other terms fixed index annuities, aka fixed indexed annuities may be referred to are FIA (short for fixed index annuity), equity indexed annuity and EIA, or simply an indexed annuity.

The growth that takes place in fixed index annuities is tax-deferred. This means that there is no tax due on the gains unless or until they are withdrawn. Because of this, growth can accelerate quickly, as gains are being generated on your contributions, as well as on any previous growth, and on the funds that would have otherwise been paid in taxes.

Consult with an Expert

How to Ensure Growth, Protection, and a Reliable Income in Retirement

As you approach retirement, protection of principal typically becomes more important than vying for significant growth (which oftentimes entails taking on more risk with your money). But depending on your financial strategy, you may have to “tradeoff” the opportunity for higher growth in order to keep from losing money in a downward moving stock market – and this can result in lower retirement income, along with lost purchasing power in the future.

The good news is that there are ways that you could attain growth and protection, as well as a guaranteed income in retirement for as long as you may need it, regardless of what happens in the stock market, with interest rates, or even in the overall economy. And the solution is easier than you might think!

Many people set aside money “for the future,” in hopes of having a base to draw retirement income from. These funds may be held in a personal IRA (Individual Retirement Account), employer-sponsored retirement plan (such as a 401k), and/or personal savings and investments.

But even if you’ve been a good saver for many years, there is no guarantee that you’ll be able to generate an ongoing, reliable stream of cash flow down the road. Plus, a significant portion of your savings could be wiped out in the event of a stock market downturn.

And that could change everything.

As you get closer to retirement, risk is a key consideration, primarily because investment losses can lead to a smaller “base” from which to draw income. Plus, the larger the loss, the more the portfolio has to generate in the future just to get back to even.

The Bigger the Loss, the More It Takes to Get Back to Even

Loss:Gain needed to get back to even:

On the other hand, until recently, interest rates on “safe” investments like CDs (certificates of deposit) and bonds have been painfully low. So, for instance, a 2% return on a $1 million dollar portfolio would only generate $20,000 per year. Is that enough for you to live on for the rest of your life?

So, the key for many who are heading towards retirement is finding an opportunity for a higher rate of return, along with protection of principal before retirement – and then a regular income stream when it is needed.

This is where the fixed index annuity, aka equity indexed annuity can help.

Tax-Deferred versus Fully Taxable Investment Returns

One of the primary differences between a fixed annuity and a fixed index annuity is the way that the return is calculated with the latter. For example, while regular fixed annuities pay fixed return that is set by the insurance company, fixed index annuities track the performance of an underlying market index, such as the S&P 500 or the DJIA (Dow Jones Industrial Average).

When the performance of the tracked index is positive in a given contract period (such as a year), a fixed index annuity is credited with a positive return – usually up to a certain maximum, or cap.

But, in contract years where the underlying index performs poorly, the annuity is not credited with a negative return. Rather, fixed index annuities will typically have a guaranteed minimum “floor” (which currently ranges between 0% to 2% on many fixed indexed annuities), which in turn, can keep principal safe in any type of market environment.

Unlike investments in the stock market, when a fixed indexed annuity’s underlying index performs in the positive again, there are no prior losses to make up for. So, the return going forward can build upon the previous gains – which are locked in, never to be lost.

The method for determining your return on a FIA can also depend on the features of the specific annuity that you have. Typically, though, you can generally choose one or more market indexes that the value of the annuity will be allocated to.

There may also be various crediting methods to choose from for tracking the changes in the underlying market index(es). Several of the factors that are involved with tracking these changes can include a(n):

1. Cap – A “cap” is a pre-set maximum on how much your annuity can earn in a given time period. For example, if the underlying index that your annuity is tracking has a return of 7%, and the annuity has a cap of 4%, your account will be credited with the 4%.

(Keep in mind, however, that if the underlying index falls in a given time period, the annuity will not incur a loss. So, if keeping principal safe is a primary goal of yours, this “tradeoff” can be well worth it).

2. Participation Rate – A participation rate on a fixed index annuity determines how much of the underlying index’s return will be used in computing the indexed return. For instance, if the participation rate on the annuity is 80%, and the underlying index returns 10% for a given period of time, the annuity will be credited with 8% for that period. (This is because 80% of 10% is 8%)

It’s important to note that a fixed index annuity could have both a cap and a participation rate. So, all of these elements need to be considered in determining the annuity’s overall return.

3. Spread – On some fixed index annuities, the return will be based on subtracting a certain percentage from any gain that the underlying index attains in a given time period. This is known as the spread.

As an example, if the annuity has a spread of 5%, and the underlying index increases by 9%, the annuity’s return for that time frame would be 4%. (9% minus 5% = 4%)

Income Stream

In addition to the opportunity for higher returns without added risk, a fixed index annuity can also offer a steady and reliable income stream, either for a pre-set time period (such as 10 or 20 years) or even for the remainder of the recipient’s lifetime, no matter how long that may be.

Joint Life Income Option

Many fixed index annuities will also offer a joint life income option where it will continue to pay out for the remainder of two individuals’ lives. This option is often chosen by partners or married couples who want to ensure that neither will run out of income in retirement.

Upon the death of the first individual, the dollar amount of the income payment may be reduced, or alternatively, it could remain the same, depending on the particular annuity.

Options for Customizing a Fixed Index Annuity

In addition to growth, tax-deferral, principal protection, and lifetime income generation, there are some other benefits that may also be offered on a fixed index annuity, such as a(n):

  • Death benefit
  • Penalty-free terminal and/or chronic illness waiver(s)
  • Long-term care waiver

FIAs typically allow the contract owner to designate one or more beneficiaries to receive a death benefit upon the owner’s death. Because these funds are paid out directly to the beneficiary(ies), it can help with avoiding the time and expense of having to go through probate.


A “stepped up” death benefit might also be an option on some annuities, whereby the amount of the proceeds is more than the amount of the annuity’s remaining contract value.

Penalty-Free Withdrawal

Some fixed index annuities will also allow for penalty-free withdrawals if the owner or annuitant (i.e., the income recipient) is diagnosed with a terminal or chronic illness and/or if they must reside in a nursing home for a certain period of time. (Usually, this time period is 90 days or longer).


In addition, even with all of the “standard” features that are found on a fixed index annuity, these financial vehicles can typically be “customized” even further using riders. Adding these enhancements can help you to better meet your specific short- and long-term objectives.

For example, income riders on fixed index annuities are contract benefits that are designed for guaranteeing a certain rate of growth that is represented as a percentage. This can help with planning for your income needs in retirement.

The Pros and Cons of a Fixed Index Annuity

Fixed index annuities can offer a number of unique advantages, both before and after you retire. Because of that, some investors and financial professionals state that these financial vehicles provide a “best of all worlds” scenario when it comes to growth, protection, and retirement income.

There are several advantages that can come with owning a fixed index annuity, such as:

  • Opportunity for a market-linked return
  • Principal protection (in any type of market or economic environment)
  • No or low fees
  • Tax-deferred growth / option to add to tax-advantaged savings
  • No required minimum distributions (RMDs)
  • Some liquidity (even during the surrender charge period)
  • Flexible contribution options
  • Death benefit (and the ability to leave a legacy)
  • The ability to “customize” the annuity with additional riders
  • Protection from creditors and bankruptcy (in some states)
  • Lifetime income in retirement

Even with all of the enticing features that a fixed index annuity can offer, though, there are some items that you should consider before making a long-term commitment to purchasing one.

Items you should consider include the following:

  • Limited liquidity in the early years (i.e., surrender period)
  • Upside Limitations (due to caps, participation rates, and/or spreads)
  • No or limited inflation protection on the income payout (on many fixed indexed annuities)
  • May have a minimum contribution requirement
  • Can be confusing due to many “moving parts”

Because not all fixed index annuities are the same, it is important that you have a good understanding of these financial vehicles before you contribute a significant amount of money to one. Talking with a retirement income specialist can help you to narrow down the best option for you and your specific needs and objectives.

Consult with an Expert

The Pros and Cons of Fixed Index Annuities

Fixed Indexed Annuity AdvantagesFixed Indexed Annuity Drawbacks
Opportunity for market-linked returnLimited liquidity in the early years (i.e., surrender period)
Principal protection in any type of market or economic environmentLimit on the upside protection (due to caps, participation rates, and/or spreads)
No / low feesNo or limited inflation protection on the income payout
Tax-deferred growth / option to add to tax-advantaged savingsMay have a minimum contribution requirement
No required minimum distributions (RMDs)Can be confusing due to many "moving parts"
Some liquidity (even during the surrender charge period) 
Flexible contribution options 
Death benefit (and the ability to leave a legacy) 
The ability to "customize" the annuity with additional riders 
Protection from creditors and bankruptcy (in some states) 
Lifetime income in retirement

How A Fixed Index Annuity Compares to Other Annuity Types

The structure of the fixed index annuity provides steady income payments and the ability to diversify a portfolio – which can help you to reduce the impact of equity market downturns. It also gives investors and retirees another possible avenue for improving their portfolio’s up/down capture, with the protection of principal and the opportunity for tax-deferred growth.

Although these financial vehicles can offer a long list of enticing features, though, it is important to know the difference between fixed index annuities and other annuity types so that you can make the best decision possible regarding your retirement savings and future income.

The two other primary types of annuities include:

  • Fixed Annuities
  • Variable Annuities

Fixed Annuities

A fixed annuity provide a specified rate of interest that is set by the offering insurance company. These annuities can also offer a known amount of income on a regular basis, when (or if) the annuity is converted over into an income stream.

With these types of annuities, you can keep principal safe in any type of market environment. Because of that, a fixed indexed annuity are often used by investors who are risk averse, as well as those who are approaching retirement and want to ensure that their principal is not at risk of loss.

In addition to their set rate of return and safety of principal, fixed annuities may also offer some added features, such as a death benefit, and/or penalty-free withdrawals if the owner is diagnosed with a terminal illness and/or is in need of long-term care services.

As with a fixed index annuity, a regular fixed annuity can be either immediate or deferred. With an immediate fixed annuity, a lump sum contribution is typically made, and then income begins right away (or within 12 months of purchasing the annuity).


Deferred fixed annuities have two different “phases.” These include the accumulation phase and the distribution, or income, phase.

During the accumulation phase, contributions can be made (either with just one single deposit, or through multiple contributions over time). The funds that are inside of the annuity are allowed to grow on a tax deferred basis, so no tax is due on this gain until the time of withdrawal.


A fixed and fixed index annuity may also be either qualified or non-qualified. For instance, if the annuity is funded with pre-tax money (such as through an employer-sponsored retirement plan or traditional IRA account), it is considered to be qualified. In this case, 100% of the money that is withdrawn will be taxable at your then-current income tax rate. This is because none of the contributions, nor the gains, have yet been taxed.

Alternatively, a non-qualified annuity is funded with after-tax dollars. (The gain in a non-qualified annuity will still grow on a tax-deferred basis, though). Therefore, only a portion of the income or withdrawals from a non-qualified annuity will be taxable. This is determined through the exclusion ratio, which refers to the percentage of an investor’s return that is not subject to taxes.

In the case of a non-qualified annuity, then, the portion of a withdrawal or income payment that is considered to be a return of principal is not taxed, and the portion that is considered gain will be taxed at your then-current ordinary income tax rate.

Pros and Cons of Regular Fixed Annuities

Fixed Annuity AdvantagesFixed Annuity Disadvantages
Set rate of returnLow return
Protection of principalSurrender charges
Tax-deferred growthLimited liquidity
Guaranteed lifetime income 
Death benefit* 
Penalty-free access to funds for health or long-term care needs*
*Note that not all features are available on all fixed annuities

Variable Annuities

Like other types of annuities, a variable annuity is a contract between an individual and an insurance company. Through this contract, the insurance company agrees to make periodic payments to the annuitant (i.e., the income recipient). These payments may begin right away, or alternatively, they may start at a time in the future.

Variable annuities offer investors a way to participate in market appreciation by tracking underlying equity investments like mutual funds. In many cases, this can offer the opportunity for unlimited growth.

Potential Loss

However, the funds that are inside of a variable annuity are not directly invested in the market, but rather they are held in “sub-accounts” at the insurance company. If these investments perform well in a given contract year, a positive return is credited to the variable annuity. However, if they perform poorly, there is the risk of loss. With a variable annuity, it is possible to lose previous gains, as well as your original contribution(s).

Oftentimes, variable annuities will also offer a fixed account that pays a set rate of interest. While the insurance company is allowed to reset this fixed interest rate, there is usually a guaranteed minimum that is stated in the annuity’s contract.

Variable annuities are considered securities. So, these financial vehicles are regulated by the Securities and Exchange Commission (SEC). Therefore, prior to purchasing a variable annuity, you must receive a prospectus.

Unlike fixed and fixed indexed annuities, variable annuities are known for charging high fees, which in turn, could have a negative impact on your overall return. In some cases, the total fees on a variable annuity could be between 1% and 3%.

Some of the most common fees that are associated with variable annuities include the following:

1. Mortality and Expense (M&E) fees – Mortality and expense fees generally cover items like the annuity payout / guaranteed income feature, as well as the annuity’s guaranteed death benefit.

2. Administrative fees – Administrative fees are typically charged on an annual basis. These cover record keeping, as well as various other administrative expenses.

3. Investment management fees – The investment management fees relate to the underlying mutual funds and/or other investments that are being tracked by the variable annuity. These fees are typically charged by each of the individual investments.

3. Rider charge(s) – If additional features, or riders, are added to the annuity, there may also be an added expense for these.

4. Surrender / early withdrawal charges – Most annuities include surrender charges. If you withdraw more than a certain amount from the annuity contract within the first several years – or if you cancel the annuity contract altogether – you will incur a surrender charge.

Typically, the amount of the surrender charge will decrease over time, until it disappears altogether. In addition, you may owe tax on your withdrawals. And, if you make such withdrawals before you are age 59 ½, an additional 10% “early withdrawal” penalty may be levied by the IRS.

Therefore, you should only contribute money to an annuity that will not be needed for emergencies or other near-term financial obligations.

Pros and Cons of Variable Annuities

Variable Annuity AdvantagesVariable Annuity Drawbacks
Opportunity for market-linked growthRisk of loss / poor performance of the underlying investment(s)
Tax-deferred gainsCharges and fees - including surrender / early withdrawal penalties
Death benefitLimited liquidity
Guaranteed income
Variable Annuity Advantages Variable Annuity Drawbacks
Opportunity for market-linked growth Risk of loss / poor performance of the underlying investment(s)
Tax-deferred gains Charges and fees – including surrender / early withdrawal penalties
Death benefit Limited liquidity
Guaranteed income

Fixed, Fixed Indexed, and Variable Annuity Comparison

Because not all annuities are alike, there are some investors and retirees that may benefit from one type of annuity and not another, and vice versa. Therefore, it can help to review a side-by-side comparison of fixed, fixed index, and variable annuities. This can guide you with narrowing down which type of annuity – if any – is best for you.

Comparing Fixed, Fixed Index, and Variable Annuities

Fixed AnnuitiesFixed Indexed AnnuitiesVariable Annuities
Contribution(s)Single or multipleSingle or multipleSingle or multiple
How return is calculatedRate set by the insurance companyUnderlying market index(es) are trackedPerformance of one or more investments (such as mutual funds)
GrowthTax deferredTax deferredTax deferred
Protection of principalYesYesNo
Risk of market lossesNoNoYes
Charges / feesLow or noLow or noHigh

The Best Insurance Companies for Fixed Index Annuities

There are many insurance carriers that offer a fixed index annuity. But not all of these insurers have the same products available. They may also differ in terms of financial strength and stability, as well as in their reputation for paying out their policy holders’ claims.

With that in mind, it is essential that you review the annuity product, as well as the offering insurance company, before you move forward with purchasing an annuity.

Some of the top companies that offer a fixed index annuity are:

  • Lincoln Financial Group
  • North American (North American Company for Life and Health Insurance)

Lincoln Financial Group

Lincoln Financial Group has been in insurance and financial services business for over a century. The company’s primary focus is to provide consumers with peace of mind by helping them to plan, protect assets, and retire with confidence.

Today, Lincoln Financial Group has approximately 16 million customers. It has a strong financial foundation and in turn, high financial strength and stability ratings from the insurer rating agencies, including a(n):

  • A+ from A.M. Best
  • A+ from Fitch
  • A1 from Moody’s
  • AA- from Standard and Poor’s

The fixed and fixed indexed annuities that are offered through Lincoln Financial can provide reliable lifetime income in any type of market or economic environment. There are several fixed indexed annuity options to choose from with Lincoln Financial Group. These include the:

  • Lincoln OptiBlend Fixed Indexed Annuity
  • Lincoln Covered Choice 5 Fixed Indexed Annuity
  • Lincoln Covered Choice 5 ll Fixed Indexed Annuity
  • Lincoln Covered Choice Advisory 5 ll Fixed Indexed Annuity
  • Lincoln FlexAdvantage Fixed Indexed Annuity

North American Company for Life and Health Insurance

North American Company for Life and Health Insurance (or simply, North American) has also been in the business of protecting their clients’ wealth – and retirement income generation – for more than a century. Today, North American is part of the Sammons Financial Group, a holding company whose member companies offer financial services and retirement products.

Throughout the years, North American has served more than 1 million customers – and as of year-end 2021, the company had in excess of 215,000 annuity policies in force. Also considered strong and stable financially, North American Company for Life and Health Insurance has high ratings, which include a(n):

  • A+ from A.M. Best
  • A+ from S&P Global Ratings
  • A+ from Fitch Ratings

In addition, North American has earned a grade of A+ from the Better Business Bureau. The company offers a variety of annuity options, including fixed indexed annuities, multi-year guarantee annuities (MYGAs), and single premium immediate annuities (SPIAs).

Is a Fixed Indexed Annuity Right for You?

Many investors, retirees, and financial professionals believe that fixed indexed annuities offer a win-win-win scenario, given that they provide the opportunity for growth, protection of principal, and an ongoing income stream in retirement that you can rely upon – possibly even for the remainder of your lifetime.

Because of this, you can reduce the stress that comes with losing money in a stock market correction, while at the same time feel assured that the dollar amount of your retirement income that is generated from a fixed indexed annuity won’t change, based on interest rate reductions in the economy.

While not everyone is a good candidate for a fixed index annuity, this particular financial vehicle could be a viable option if you are seeking one or more of the following:

  • Index-linked growth
  • Tax deferred gains
  • Safety of principal even when the stock market goes down
  • Access to funds if needed (usually up to 10% of the contract value during the surrender period)
  • The ability to leave a legacy
  • A lifetime stream of income that you can count on for the remainder of your (and possibly also your spouse or partner’s) lifetime – regardless of how long you may need it

How to Match a Fixed Indexed Annuity with Your Unique Goals and Needs

The ideal retirement can differ – sometimes substantially – from one person to another. Everyone also has different time frames and levels of risk that they’re comfortable taking with their money. That’s why there is no such thing as a one-size-fits-all investment or insurance product that works for all.

Given that, before you make a long-term financial commitment to purchase a fixed indexed annuity, it is recommended that you first understand how and why this type of financial vehicle may (or may not) fit into your overall portfolio.

Working with a retirement income specialist can help. At Insurance and Estates, we specialize in helping our clients protect the people they love. This includes ensuring that you have income for life – regardless of market or economic conditions – so that you can focus on the more important things in life.

If you would like to learn more about fixed indexed annuities in order to determine whether or not this financial vehicle would be a good fit for your needs, feel free to contact us directly by calling (877) 787-7558 or you can simply click the button below to request an fixed index annuity expert give you a call at your earliest convenience.

Consult with an Expert

Browse more articles on life insurance

Self Banking Blueprint
Enter your name and email to get free access.

"*" indicates required fields

By pressing the Submit button, you agree to use InsuranceandEstates' privacy policy and terms. InsuranceandEstates may contact you at the number you entered on this webpage using our automatic dialing system to market our life insurance products. Alternatively, you can contact us at 877-787-7558.

I read the disclaimer above.*
This field is for validation purposes and should be left unchanged.

Money Secrets of the Wealthy
Enter your name and email to get free access.

"*" indicates required fields

By pressing the Submit button, you agree to use InsuranceandEstates' privacy policy and terms. InsuranceandEstates may contact you at the number you entered on this webpage using our automatic dialing system to market our life insurance products. Alternatively, you can contact us at 877-787-7558.

I read the disclaimer above.*
This field is for validation purposes and should be left unchanged.