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?

What exactly are annuities, what are the differences between them, and how do you know when to market one versus another? Keep reading to find out!

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, putting them behind on their retirement savings. Americans near or of retirement age could be in trouble when it comes to having enough money saved to live out their golden years worry-free.

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, leaving this age range likely well short of enough.

The average amount saved up 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 regular payments in exchange for policyholder-paid premiums. To get into more specifics, we’ll need to take a closer look at the different types of annuities.

Fixed Annuities

By and large, a fixed annuity is a contract between your client and the insurance company that guarantees both the principal — the initial money invested by the policyholder — and the annual rate of return — percentage increase in the value of the money invested over a year — on your client’s investment. Like a bank Certificate of Deposit (CD), fixed annuities are low-risk investments that are not affected by the ups and downs of the stock market.

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. Conversely, 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, and the interest earned is tax-deferred until payments begin. Determining the best rate for fixed annuities can be tricky, however, so 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?

So as to not be surprised, note that fixed annuities can have fees, such as administrative fees, surrender charges for early withdrawals, and option rider fees.

Indexed Annuities

Generally speaking, an indexed annuity is a contract between your client and the insurance company that guarantees the principal and possibly, but not always, 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, with the rate of return 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?

Because the return for an indexed annuity is based on one or more indexes, its interest rate will vary throughout the contract. As with fixed annuities, an indexed annuity can offer a guaranteed minimum return, typically between one percent and three percent, even if the index it’s tied to does poorly. However, a major benefit of indexed annuities is that, 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: Another common interest crediting method, 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 and will be 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, which is a percentage of the interest subtracted from any gain in the index.

Guaranteed Minimum Income Benefit Riders

An enticing feature included with many indexed annuities is 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, which is based on the performance of a specified index
2. The GMIB account value

The GMIB account value is hypothetical and is only used to determine the amount of income the annuitant will receive when they elect to begin receiving annual income.

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 ten 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, and is only the hypothetical GMIB account value.

GMIB riders usually have a rider fee associated with them. However, if your client intends to annuitize the policy and use it as retirement income, a GMIB rider offers a guaranteed minimum income amount that will much likely be higher than the income amount from an actual market value account without the rider in place.

Fixed Indexed Annuities

Last but not least, 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 linked to a specific market index, like the S&P 500 index.

Another type of contract between an annuitant and insurer, this annuity acts like a nexus of fixed and indexed annuities and 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 or the return from a specified stock market index. The policy owner is guaranteed to receive back at least all the principal investment in a fixed index annuity, minus any withdrawal charges. And 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 or spreaders or rate caps, similar to indexed annuities.

Are There Fees on Fixed Indexed Annuities?

Keep in mind, fixed indexed annuities may have varying interest caps, surrender charges for early withdrawal, spreads, and internal fees. As your client’s trusted advisor, you should fully disclose these figures up front and 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, and they work well when allocated 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. Although the policy value may be affected by the performance of a specified index, the policy is not a security and does not directly or indirectly participate in that specified index.

Additionally, the performance of your client’s fixed indexed annuity, due to caps, spreads and other variables, may not have returns matching the returns of the specified index. Also, dividend payments attributable 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 never mislead clients.

Surrender Charges

For all three types of annuities, the annuitant will incur surrender charges if they cancel their contract or withdraw an amount of money more than a penalty-free withdrawal allowance for a given year, 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 as well as fixed indexed annuities have surrender periods that also vary in contract terms, with the most common being 10 years and the longest being 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, but 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 with a safer way to build their retirement savings while protecting those funds from a downturn in the market. Additionally, both can provide a steady, lifetime monthly income, allowing 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. If your client has little interest in the stock market or how it works, and has never had investments tied to it, an indexed or fixed indexed annuity is most likely not the right product for that client. However, if your client appears to be stock market-savvy, understands the product, and has clear expectations about potential future earnings and possible charges, 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 via an easy-to-understand, generally unbiased approach. Providing this alert for your clients will allow both you and your client to discuss and determine if an indexed annuity is right for them.

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