Fixed indexed annuities.

The floor is the point

A fixed indexed annuity credits interest based on the movement of a market index — but you are not invested in the market. You do not own the index. You own a contract that uses the index as a measuring stick for how much interest gets credited, within limits set by the insurance company.

The core feature is this: in a year when the index goes down, your credited interest is zero. Not negative. Your account value does not fall because of market performance.

For someone who watched a balance drop in 2008 and never quite got over it, that floor is the whole reason to look at this product. You give up some upside to make sure a bad year is a flat year instead of a painful one.

The cap is the price you pay for the floor

Here is the part the brochures rush past. Because the company absorbs your downside, it limits your upside. That happens through some combination of:

• A cap — the maximum interest you can be credited in a period, regardless of how far the index rises.
• A participation rate — you receive a stated percentage of the index's gain rather than all of it.
• A spread — a percentage subtracted from the index gain before interest is credited.

And one more thing that surprises people: index gains are typically measured on price movement only, so dividends are generally not included. Over long periods, dividends are a meaningful share of total market return. Leaving them out is part of how the economics work.

None of this is hidden or improper. It is simply the trade. But you should understand you are buying protected, limited growth — not market returns with a safety net.

Income riders

Many indexed annuities offer an optional rider that guarantees a future income stream, often with a separate “benefit base” that grows at a stated rate. Two things to hold onto:

• The benefit base is generally not a walk-away value. It is a number used to calculate income payments. It is usually not what you get if you cancel the contract and take your money.
• Riders cost money, usually charged annually against the account value.

Riders can be genuinely useful for someone who wants a predictable future paycheck. They are also where confusing sales presentations do the most damage. If someone shows you a big growing number, ask plainly: “Is that money I can walk away with, or is that only used to calculate income?”

Who this tends to fit

• Someone who wants more growth potential than a fixed annuity but cannot tolerate a loss year
• Someone with a long enough time horizon to sit through the surrender period comfortably
• Someone who wants a guaranteed future income stream and understands what a rider does and costs
• Someone placing a portion of their savings here, not all of it

Who this tends not to fit

• Anyone who wants full market returns — this is not that product
• Anyone who needs liquidity
• Anyone who cannot explain, in their own words, how their contract credits interest
• Anyone being pressured toward a decision

The three questions that cut through the pitch

1. How is interest actually credited on this contract, in plain language?
2. What are the current cap, participation rate, or spread — and can the company change them later?
3. If I cancel in year three, what is the exact dollar amount I walk away with?

Written answers to those three tell you most of what you need to know. Ask me for them in writing before you sign anything — I will give them to you.

This page is educational and is not a recommendation to buy any product. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Fixed and fixed indexed annuities only — variable annuities are securities products and are not offered here. Not affiliated with or endorsed by any government agency.