Fixed Index Annuities: How They Protect You

With today’s market volatility, many retirement savers are searching for ways to protect their savings and secure a more predictable future. Most aren’t just planning to retire — they want to stay retired comfortably and confidently.

How can you safeguard the wealth you’ve worked hard to accumulate? The right answer depends on your individual circumstances, including your risk tolerance, liquidity needs, and long-term goals.

One proven option is a fixed index annuity. Offered by financially stable life insurance companies, fixed index annuities give you a way to preserve your “can’t-afford-to-lose” money with protection and growth potential.

A Great History of Protecting People’s Money

Life insurance companies have a long-standing track record of reliability when it comes to safeguarding policyholders’ funds. They are required to maintain dollar-for-dollar reserves for every dollar of annuity premium collected.

These insurers are regulated on the quality of assets they can hold, with the majority of funds invested in U.S. Treasuries, highly rated corporate bonds, and other conservative fixed-income instruments.

Insurance companies also receive regular financial strength ratings from agencies like A.M. Best and Moody’s. These ratings help assess their ability to meet long-term commitments.

Have you ever asked your stockbroker or bank advisor what their creditor rating is? Probably not. That’s because insurance companies are evaluated by their risk management performance — a core distinction between insurers and investment firms.

From 1982 to 2010, just 291 out of thousands of health and life insurers failed — and when that happened, state insurance regulators stepped in to make good on claims.

How a Fixed Index Annuity Can Benefit You

As a retirement saver, a fixed index annuity helps you shield your principal from index downturns while giving you the chance to earn interest when markets rise. The growth is linked to a benchmark index, often the S&P 500 price index, though many contracts now offer multiple options.

It’s important to note that most benchmarks exclude dividends. These annuities are insurance products, not direct investments.

When the index increases, you earn interest based on a portion of that gain. When it falls, you don’t lose money — your worst-case interest credit is 0%. That’s why many say “zero is your hero.” Your principal is protected from index-related losses.

How Do Fixed Index Annuities Work?

Any interest you earn in a prior crediting period is locked in — you can’t lose it due to future market declines. This gives your account value a ratcheting effect over time.

In exchange for this protection, insurers limit your upside growth through mechanisms such as caps, participation rates, and spreads. These help insurers manage risk while keeping your principal safe.

More on Caps and Participation Rates

Caps are maximum limits on how much interest you can earn. For example, if your cap is 5% and the benchmark index gains 25%, you’ll earn only 5% interest.

Participation rates determine how much of the index’s growth you receive. A 70% participation rate means that if the index grows by 10%, you’ll be credited with 7% (10% × 70%).

Spreads are subtracted from index gains. If the index rises by 10% and your contract has a 2% spread, your credited interest would be 8%.

How Much Could Your Money Grow?

Fixed index annuities have historically outperformed traditional fixed-income tools like bonds and CDs, especially in sideways or modestly rising markets.

Fixed annuities often credit 20–30% more interest than traditional bank savings products. Indexed annuities offer even greater potential — many have achieved long-term returns in the 3% to 6% range, depending on market conditions and contract design.

Some contracts are optimized for income, while others focus on accumulation. Your goals should drive the type of annuity you choose. Speak with a licensed agent to determine what best suits your retirement needs.

Can You Lose Money with a Fixed Index Annuity?

The primary way you could lose value in a fixed index annuity is by withdrawing more than the penalty-free amount during the surrender period. These surrender charges protect insurers from early contract terminations and ensure stability.

Surrender schedules can range from 5 to 15 years depending on the contract. Most allow you to withdraw 5% to 10% of your contract value annually without penalty. Once the surrender period ends, the annuity becomes fully liquid.

Withdrawals may also be subject to ordinary income taxes. Consult a licensed professional for tax-specific advice based on your situation.

See How You Can Protect Your Money

While annuities date back to Roman times, fixed index annuities are a modern innovation, introduced over 25 years ago. Their rising popularity stems from the combination of principal protection and the ability to earn reasonable interest without market exposure.

If you’re looking for a retirement strategy that offers safety, tax-deferred growth, and optional income features, a fixed index annuity may be worth exploring.