Indexed Annuities: Fixed-Index and Equity Indexed Annuities

Christian Worstell
In this article...
  • Learn about indexed annuities and how they can help you reach your retirement goals. Explore adjusted values, rate caps, yields and more.

Are you considering an indexed annuity as part of your retirement plan? An indexed annuity could be a great choice for your retirement portfolio, but it's critical to understand how indexed annuities work, including things like rate caps and market indexes.

In this guide, we'll provide an in-depth look at indexed annuity contracts to help you make the best decision for your retirement plan. We'll discuss everything from adjusted values to why a fixed index annuity or equity-indexed annuities might be a good fit for your portfolio.

Table of Contents:

What Is an Indexed Annuity?

An indexed annuity is a form of fixed-rate retirement savings plan that provides protection from market downturns while offering the potential for greater yields than standard fixed annuities. Indexed annuities provide investors with the opportunity to benefit from market growth while avoiding any direct risk.

  • Yields are a measure of return, usually expressed as a rate. An indexed annuity can provide a yield that is linked to the performance of a specific market index such as the S&P 500 or another stock index, with rate caps restricting gains from whatever the specific index the annuity uses.

  • Rate caps limit how much yield can be earned by the annuity. A rate cap limits how much exposure you have to gains within the underlying specific market index during any given period.

  • The adjusted value is determined by multiplying each point change in the underlying specific index by a set amount called "participation rate." This adjusted value reflects what portion of growth in the underlying index will actually contribute to your account balance over time.

Indexed annuities may be attractive investments for those who want some protection against market downturns but still want to benefit from long-term appreciation opportunities provided by stocks and other equities. They also provide tax deferral benefits similar to those offered with traditional fixed-rate products.

Some indexed annuity contracts may include features like guaranteed minimum income payments upon retirement or death benefits that pass along unused funds after you die. A fixed annuity contract often come with riders that protect against inflation risks over time – a feature not available with most traditional fixed-rate products

An indexed annuity may supply greater potential yield than a conventional fixed-rate annuity, with some safeguard against market declines.

Key Takeaway: Indexed annuities offer investors a way to capitalize on the potential for higher returns than traditional fixed-rate products without taking on any direct risk. They are designed to track a market index such as the S&P 500 and have rate caps that limit how much yield can be earned while providing tax deferral benefits, inflation protection and death benefit options.

How Does an Indexed Annuity Work?

Indexed annuities are based on the performance of a stock. market index, but with some added protection for investors.

The return on an indexed annuity is linked to the performance of the index it is based on, but with a cap or maximum rate of return. This means that if the index performs well and returns more than what was promised in your contract, you will still only receive up to the predetermined amount specified in your agreement.

When investing in an indexed annuity, consider the annuity contract's yield rates and rate caps.

  • Yields refer to the potential for earnings over time, usually expressed as a yearly rate of return (APR).

  • Rate caps limit how much money you can make each year from your investment. They are set by insurance companies when offering indexed annuities so they know exactly what their potential liabilities to lose money will be if investments perform better than expected.

An indexed annuity could be a viable choice for those wanting to reap some of the advantages linked with traditional fixed-rate annuities, while simultaneously saving money.

What Are Yields and Rate Caps?

Yields refer to the rate of return on an indexed annuity. The rate of return on an indexed annuity is determined by the performance of a benchmark index such as the S&P 500 or Nasdaq Composite, with yields ranging from 0% to 10%, and capped at 1-10%.

An indexed annuity with a rate cap of 5% limits the yield to no more than 5%, regardless of any market gains. This means that even if the benchmark index rises 20%, your yield will still be limited to 5%.

On the other hand, some indexed annuities offer no-cap options which allow investors to benefit fully from any increases in their chosen benchmark index.

Investors must be aware of yields and rate caps when looking into indexed annuities, as these elements decide the amount earned over time and the risk level taken. Yields provide potential returns while rate caps protect against extreme losses due to volatile markets.

What Is an Adjusted Value?

An adjusted value is the amount of money you will receive when you cash out your indexed annuity. The adjusted value takes into consideration any fees or charges, as well as any changes in interest rates or market fluctuations that could affect your payout amount.

This means that if the stock market has gone up since you purchased your annuity, then the adjusted value will be higher than what you initially paid for it. On the other hand, if the stock market has gone down since you bought it, then the adjusted value could be lower than what you originally invested.

When calculating an adjusted value for an indexed annuity, several factors are taken into consideration including yield, rate caps and any fees associated with cashing out early before maturity. Some companies may offer bonus payments for customers who keep their annuity contract until the full term expires. Consequently, it pays off (pun intended) to weigh all options carefully prior to finalizing your investment choices.

Knowing exactly how much you stand to gain (or lose) by cashing out early versus waiting until maturity could mean big savings (or losses) in both short-term and long-term scenarios.

Fixed Index Annuities vs Equity Indexed Annuities

Fixed indexed annuities (FIAs) and equity index annuities (EIAs) are two popular types of indexed annuities that differ in the way they invest your money.

  • Fixed-indexed annuities invest a portion of your premium into an underlying fixed interest rate instrument and the other portion into equity indices (any specific stock market index), depending on the terms of the policy.

  • Equity-indexed annuities, on the other hand, invest entirely in equity indices and do not include a fixed interest rate instrument.

The potential upside of indexed annuities is that they offer both a guaranteed return as well as potential for higher returns depending on market performance. However, there are also drawbacks to consider such as surrender charges if you want to withdraw funds early and there may be fees associated with the policy. Additionally, taxes will apply when taking out distributions.

It is important to do your research and understand the terms of any indexed annuity before investing in one. Carefully consider both short-term and long-term scenarios to determine if an indexed annuity is right for you and whether you want a lump sum payment or guaranteed payments over a period of time.

Why Might an Indexed Annuity Be a Good Investment Option?

Indexed annuities offer investors an attractive option to add to their financial plan. These products provide protection from market losses while still providing potential for higher returns than traditional fixed annuities. Indexed annuities provide investors with the opportunity to benefit from stock market growth without taking on as much of the associated risks.

Investors who choose indexed annuities benefit from tax-deferred growth and have access to their money when needed through withdrawals or loans against the value of their account. They also may be able to receive periodic payments if they choose a product that offers income riders.

Protecting investors from downside risk while still allowing them to partake in some of the upside gains when markets rise over extended periods, indexed annuities are distinct from other investments due to how their yields are calculated.

Unlike mutual funds and ETFs which employ time-weighted returns, these products base their yields on changes in an underlying index during pre-determined cycles rather than daily market fluctuations.

Yields can vary depending on how much participation rate is chosen, meaning how much you will get back if there is positive movement in your chosen index during each cycle period. This amount could range anywhere between 0% - 100%.

At the end of each cycle period (typically annually), you can track your progress towards meeting your personal finance goals. The adjusted value of your annuity will be equal to your initial investment plus any accrued interest minus any applicable fees or charges due upon withdrawal/termination/loan repayment.

Overall, indexed annuities offer investors several advantages including protection from market losses along with potential for higher returns compared to traditional fixed products, making them a viable option for retirement planning needs.

Indexed Annuity FAQs

What does Dave Ramsey say about indexed annuities?

Dave Ramsey is a financial expert who has mixed opinions on indexed annuities. He views indexed annuities as potentially helpful for some yet cautions against them due to their intricate nature and potential costly fees.

Ramsey recommends taking the time to investigate and comprehend every aspect of an indexed annuity before investing, as well as consulting with a reliable financial professional concerning any queries. Ultimately, Dave Ramsey suggests that investors should only consider an indexed annuity if it fits into their overall investment strategy and goals.

What does Suze Orman say about index annuities?

Suze Orman is an advocate for financial security and has expressed doubt about index annuities. She says that these financial products can give retirees payouts that don't keep up with inflation, and she cautions against the high fees you typically face for withdrawing funds before the annuity contract maturity date.

What is the downside of indexed annuities?

Indexed annuities can be a good option for those seeking to generate income and protect against market volatility. However, there are some drawbacks to consider before investing in an indexed annuity such as

  • Higher fees than other investments
  • Limited liquidity with potential surrender charges or penalties
  • Lack of transparency regarding index performance calculation and interest rate risk if the underlying index does not perform well
  • Not FDIC insured and can be difficult to understand

Are indexed annuities a good idea?

Your income stream, your goals for retirement income, customer reviews of the issuing insurance company, the financial strength of your dream investments and your appetite for risk will determine whether indexed annuities are suitable for your goals.

Indexed annuities can offer a guaranteed return, protection from market losses and tax deferral benefits. They also come with fees that could reduce returns over time, however. Before investing in an indexed annuity, it is essential to carefully consider the fees, restrictions and penalties associated with them in addition to the income payments.


In summary, indexed annuities could be a great way to diversify your retirement strategy and ensure financial security. It is important to understand the workings of these products, such as yields and rate caps, adjusted values and participation rates in order to make informed decisions about whether this type of investment is right for you. 

Discover the benefits of an indexed annuity and how it can help you age with financial security.

Christian Worstell
About the Author

Christian Worstell is a senior Medicare and health insurance writer with He is also a licensed health insurance agent. Christian is well-known in the insurance industry for the thousands of educational articles he’s written, helping Americans better understand their health insurance and Medicare coverage.

Christian’s work as a Medicare expert has appeared in several top-tier and trade news outlets including Forbes, MarketWatch, WebMD and Yahoo! Finance.

While at HelpAdvisor, Christian has written hundreds of articles that teach Medicare beneficiaries the best practices for navigating Medicare. His articles are read by thousands of older Americans each month. By better understanding their health care coverage, readers may hopefully learn how to limit their out-of-pocket Medicare spending and access quality medical care.

Christian’s passion for his role stems from his desire to make a difference in the senior community. He strongly believes that the more beneficiaries know about their Medicare coverage, the better their overall health and wellness is as a result.

A current resident of Raleigh, Christian is a graduate of Shippensburg University with a bachelor’s degree in journalism. You can find Christian’s most recent articles in our blog.

If you’re a member of the media looking to connect with Christian, please don’t hesitate to email our public relations team at

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