Fixed vs. Indexed vs. Fixed Indexed Annuities: What’s the Difference?

You’ve heard it before, and it’s true: Americans are concerned about outliving their savings. Did you know that means now’s the time to sell annuities?

If you’re asking yourself any of the following questions:

• What exactly are annuities?
• What are the differences between them?
• How do you know when to market one versus another?

Keep reading to find out!

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Why Are Annuities Important for Your Clients?

According to a 2025 survey, around 40 percent of Americans have less than $50,000 saved for retirement. This amount puts them behind on their retirement savings. Americans near or of retirement age could be worried that they don’t have enough money saved to live out their golden years.

The average amount saved by those in the age range closest to retirement (55 to 64) is $256,244. Experts recommend people save anywhere from at least eight to 12 times one’s annual income for retirement. The age range is likely left short.

The average amount saved by those in the age range closest to retirement (55 to 64) is $256,244.

You can’t solve all your clients’ financial problems or worries. However, you can offer them another potential solution: annuities.

These financial products provide policyholders with regular payments in exchange for premiums. To get into more specifics, we’ll need to take a closer look at the different types of annuities.

Fixed Annuities

A fixed annuity is a contract between your client and the insurance company. It guarantees both the principal and and the annual rate of return on your client’s investment.

Note:

• Principal is the inital money invested by the policyholder.
• Annual rate of return is the percentage increase in the value of money invested over a year.

Fixed annuities are low-risk investments that are not affected by the ups and downs of the stock market. This is much like a bank Certificate of Deposit (CD).

What Are the Different Types of Fixed Annuities?

There are a few kinds of fixed annuities, such as fixed rate and multi-year guaranteed annuities (MYGAs). The fixed rate is a basic guaranteed interest rate while the MYGA has time-period guarantees. It’s important to note that fixed annuities may or may not be tied to an index, depending on the exact product.

A fixed annuity can be immediate, like single-premium immediate annuities, or deferred. Immediate annuities allow the policyholder, or annuitant, to begin receiving payments the month after they open the annuity.

Deferred annuities postpone the annuitant’s payments until a future date to allow time for growth of the principal.

What Are Interest Rates on Fixed Annuities Like?

Unlike bank CDs, fixed annuities typically have much better interest rates and can provide lifetime payouts.

Interest rates for fixed annuities remain the same for the full length of the contract. The interest earned is also tax-deferred until payments begin. Determining the best rate for fixed annuities can be tricky. Be sure to do your research regarding the different kinds of rates.

Fixed annuities typically have much better interest rates than bank CDs and can provide lifetime payouts.

Remember, fixed rate annuities have a basic guaranteed interest rate while MYGAs have time-period guarantees.

Are There Fees on Fixed Annuities?

Note that fixed annuities can have fees, such as:

• Administrative fees
• Surrender charges for early withdrawals
• Optional rider fees

Indexed Annuities

An indexed annuity is a contract between your client and the insurance company. The contract guarantees the principal, sometimes, a minimum rate of return.

Indexed annuities are much more complex than fixed annuities. Why? This type of product offers features of both fixed annuities and variable annuities. The rate of return, however, is tied to the stock market!

It’s important to note that indexed annuities are not all fixed. Make sure your client thoroughly understands the product they are purchasing, its benefits, and its limitations.

What Are Interest Rates on Indexed Annuities Like?

The return for an indexed annuity is based on one or more indexes, so its interest rate will vary throughout the contract. Like fixed annuities, an indexed annuity can offer a guaranteed minimum return. This is true, even if the index it’s tied to performs poorly.

Typically, the return is between one percent and three percent. However, if the index is performing well, the annuitant has the potential to earn much higher interest rates!

It’s important that your client understands a product, its benefits, and its limitations.

Interest on an indexed annuity typically follows one of the index crediting methods below. Sometimes, the calculation may involve a combination of these crediting methods.

• Interest Rate Caps: Some indexed annuities use a cap to determine how much interest will be credited in each time frame. For example, if the annual cap rate is five percent for a particular year and the index that the client’s annuity is linked to gains eight percent, the client would receive only five percent interest that year. If the indexed only gains 4.5 percent, the client would receive the full 4.5 percent interest for that year.

• Participation Rates: A participation rate defines how much of the rise in the given index will be credited to the client for each predefined period. For example, if the client’s participation rate is 60 percent and the index rises 14 percent that year, the client would be credited 60 percent of that rise, or 8.4 percent interest.

• Spreads: A spread or asset fee can be used either in combination with or instead of a participation rate. The spread is usually defined as a percentage, subtracted from any gain in the index. For instance, if an index gains eight percent each year and the client’s defined spread or asset fee is four percent, this results in a credited rate of four percent for the client.

Are There Fees on Indexed Annuities?

Indexed annuities can have high surrender charges that can range from 10 percent to 20 percent. They may also have a spread or asset fee. These fees are a percentage of the interest subtracted from any gain in the index.

Guaranteed Minimum Income Benefit Riders

Many indexed annuities have a rider guaranteeing a minimum annual income based on a specified interest rate. The Guaranteed Minimum Income Benefit Rider (GMIB) only applies if a client annuitizes their contract. How does it work?

An annuity with a GMIB has two separate account values:

1. The actual market value of the annuity, based on the performance of a specified index
2. The GMIB account value

The GMIB account value is hypothetical. It’s only used to determine the amount of income the annuitant will receive when they start receiving it.

GMIBs usually offer a guaranteed percentage of annual interest for a specific number of years. For example, a seven percent guaranteed annual interest rate for the first 10 years of the policy. It is important that the client understands this guaranteed rate is:

• Not credited to the actual market value of the annuity
• Cannot be withdrawn
• Is only the hypothetical GMIB account value

GMIB riders usually have a rider fee associated with them. A GMIB rider offers a guaranteed minimum income amount. This is especially important if your client intends to use the policy as retirement income. It will likely be much higher than the income from an actual market value account without the rider in place.

Fixed Indexed Annuities

Finally, a third, very important type of annuity exists ― the fixed indexed annuity! This used to be known as the equity-indexed annuity. These long-term investments offer a blend of principal protection and potential growth. The are linked to a specific market index, like the S&P 500 index.

This annuity acts like a nexus of fixed and indexed annuities. It is not to be confused with indexed annuities themselves. Fixed index annuities grow at the greater of two outcomes:

• The annual guaranteed minimum return rate
• The return from a specified stock market index

The policy owner receives back all the principal investment in a fixed index annuity, minus any withdrawal charges. Since annuities are tax-deferred, those close to retirement age can stow away money with no annual contribution limit.

What Are Interest Rates on Fixed Indexed Annuities Like?

Fixed indexed annuity rates can be luck-based and completely out of your control. So, if the stock market index soars, the annuity pays a greater amount. If the market falls, the minimum rate of return is credited.

Fixed indexed annuities can have participation rates, spreads, or rate caps, like indexed annuities.

Are There Fees on Fixed Indexed Annuities?

Fixed indexed annuities may have:

• Varying interest caps
• Surrender charges for early withdrawal
• Spreads
• Internal fees

As your client’s trusted advisor, you should fully disclose these figures up front. You should also be sure that your client fully understands the product they are purchasing.

Can a Fixed Indexed Annuity Work for my Client Like the Other Annuities?

Yes! Fixed indexed annuities were designed to compete with CDs. They work well when distributed properly within a portfolio and realistic return expectations are understood.

Seniors with higher return expectations and sophisticated knowledge of the stock market are ideal suitors for fixed indexed annuities.

Even those without knowledge of the stock market can find security in these annuities. Most seniors on fixed incomes can’t risk the instability of the stock market, but that doesn’t mean they can’t benefit.

Even those without knowledge of the stock market can find security in these annuities.

The pitch is simple: Clients can benefit from a stock market climb while being protected from a stock fall. It’s important to give your clients realistic expectations of their investment returns.

The policy value may be affected by the performance of a specified index. However, the policy is not a security and does not directly or indirectly participate in that specified index.

The performance of your client’s annuity, may not have returns matching the returns of the specified index. This is usually due to caps, spreads, and other variables. Also, dividend payments tied to that index are not included or credited to your client’s policy value.

It’s important to give clients realistic expectations on their investment returns.

We wholly believe that fixed indexed annuities are sound investment options for those nearing or in retirement age. However, they can be difficult to understand, so you should be clear and never mislead clients.

Surrender Charges

For all three types of annuities, the annuitant may incur surrender charges. This only happens if they cancel their contract or withdraw an amount of money more than a penalty-free withdrawal allowance for a given year. This happens specifically during the annuity-specific surrender period.

Of important note, surrender periods are not usually the full length of the annuity contract. However, they can be the length of the annuity contract.

Fixed annuities often have surrender periods that are for three, five, seven or 10 years. Indexed and fixed indexed annuities have surrender periods that also vary in contract term. The most common is 10 years and the longest is 12 or 15 years.

If an annuitant chooses to cancel their contract prior to the end of the surrender period, hefty surrender charges will apply. The surrender charges for both types of annuities can be as much as 10 percent. These charges will vary between carriers. However, they usually decline over time, typically one percent per year.

Determining the Best Fit

Your mission is to help resolve your clients’ fears of outliving their money. Annuities can provide the average person a safer way to build their retirement savings. It can also protect those funds from a downturn in the market.

Additionally, both can provide a steady, monthly lifetome income. This allows clients to plan their retirement more clearly.

Generally, the more informed your client is, the happier they will be with their investment.

You, as the agent, must assess your client’s interests, knowledge, and financial situation. An indexed or fixed indexed annuity is most likely not the right product for clients that:

• Have little interest in the stock market or how it works
• Has never had investments tied to the stock market

However, if your client appears to:

• Be stock market-savvy
• Understand the product
• Have clear expectations about potential future earnings and possible charges

You can discuss any type of annuity as a possible building option for your client’s retirement savings.

Generally, the more informed your client is, the happier they will be with their investment. The Financial Industry Regulatory Authority (FINRA) has developed an Investor Alert explaining indexed annuities.

It’s created through an easy-to-understand, generally unbiased approach. Providing this alert for your clients will allow you and your client to discuss and determine if an indexed annuity is right for them.

We understand that some of these topics can be a lot of information or confusing. Despite the complexities, annuities could be great options for your clients! Once you learn and master knowledge on annuities, informing your clients can be a piece of cake!

Whether you feel confused or hesitant, Ritter is here to help! Register with Ritter today for free to access more tools, information, and resources! With Ritter at your side, explaining concepts to clients can be a breeze!