What Is the Difference Between Fixed Annuity & Fixed Index Annuity?
An annuity is a type of savings product that accumulates interest for a set period of time and then provides income in the form of one payment or multiple small payments. Fixed annuities and fixed indexed annuities both guarantee that you will earn some type of interest on your investment, but there are differences in the way the interest is determined.
Types of Interest
Fixed annuities provide a set rate of interest for a period of time outlined when you purchase the annuity, such as one or three years. Fixed index annuities usually have two rates of interest–one that rises and falls with an average earnings rate like the Dow Jones industrial average, and a fixed rate you earn when the stock exchange rate falls below the fixed rate.
Assume you have a fixed index annuity that pays either a fixed rate of 4 percent or an indexed rate based upon the average performance of an exchange minus 2 percent. If the stock exchange was earning an average of 8 percent, your fixed index annuity would pay the indexed rate of 8 percent minus 2 percent for a 6 percent interest rate. If the stock exchange average earnings falls below 6 percent, you would automatically earn the fixed rate of 4 percent.
Benefits of Fixed Index Annuities
Fixed index annuities have the potential to earn higher interest rates than regular fixed annuities during times when stocks are on the rise.
Both fixed and fixed index annuities typically pay higher rates of interest than certificates of deposit. In addition, the interest earned in an annuity accumulates on a tax-deferred basis, which means you do not have to pay federal income taxes on the earnings until you withdraw the money from your annuity.
Neither fixed nor fixed index annuities are insured by the FDIC. This means you are not covered by deposit insurance if the insurance or investment company that issued your annuity becomes insolvent.