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What Is a Fixed Index Annuity?

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on December 1, 2021

A fixed index annuity (FIA) is a tax-deferred financial product that allows an individual to save money for retirement by investing in an insurance contract.

The investor chooses how much to contribute and when they want to start withdrawing the funds, usually after retirement age.

FIAs are regulated by the Security Exchange Commission and state insurance commissioners and follow guidelines set by the National Association of Insurance Commissioners.

How Does This Work?

The FIA contracts are typical with an insurance company. The money you contribute, as well as any investment earnings, are pooled together to form a general account.

Your contract will have a guaranteed minimum interest rate, which is the minimum amount your account will earn each year.

However, unlike a certificate of deposit (CD) or other fixed income product, you can invest in an FIA for a variety of terms (typically 10 to 30 years) and the interest rate will be fixed for that period.

The longer your term is, the higher your rate of return is likely to be. However, if rates are rising at the time of your investment, you may miss out on the current, better rates.

FIAs also have a minimum guaranteed withdrawal amount (if you retire before age 59 and a half) and they require withdrawals after the owner’s death.

If you die or become permanently disabled, your annuity is paid out to your beneficiary tax-free. You can name one if you’re single, and one for each child if you have any.

Pros of Investing in an FIA 

There are a few advantages of investing in an FIA:

Safety and Security

Annuities are regulated by the SEC and state insurance commissioners, which gives investors a sense of security knowing their money is in good hands.

Income

FIAs offer guaranteed lifetime income, which can be helpful for retirees who are worried about outliving their money.

Tax Advantages

Contributions to FIAs are tax-deductible, and the earnings grow tax-deferred.

Guaranteed Growth

FIAs offer a guaranteed rate of return on your investment, so you can be sure your money will grow at a set rate.

Flexibility

FIAs allow you to either take your money out in a lump sum or withdraw more regularly.

Cons of Investing in an FIA 

While there are a few good things to be said about FIAs, there are also a few potential drawbacks:

Risk of Market Drop

If you invest in an FIA and the market plummets in value, your return will likely drop as well.

Fees and Charges

FIAs typically have higher fees than other investment options, so you’ll need to do your research to find the best deal.

Death Benefits May Not be Enough

If you die soon after investing in an FIA, your beneficiary may not receive enough money to cover all the costs.

The Future of FIA

FIAs have been growing in popularity in recent years as Americans become more and more concerned about retirement planning.

In a market where interest rates are low, FIAs are becoming an increasingly attractive option for people looking for a safe place to invest their money.

However, it’s important to remember that FIAs are not right for everyone and it’s important to do your research before investing.

Final Thoughts

Before investing in an FIA, it’s important to weigh the pros and cons and make sure it’s the right choice for you.

FIAs can be a great way to save for retirement, but it’s important to be aware of the risks involved.

Do your research, talk to an advisor, and make sure you understand what you’re getting into before investing.

A fixed index annuity (FIA) is a contract between an insurance company and an investor in which the company agrees to pay the investor a set rate of interest on their investment, usually for a period of 10 to 30 years.
With an FIA, you make a lump-sum payment to the insurance company. Your FIA also has an underlying account where your money is invested. The rate of return on that investment is dependent upon how well the overall market does.
FIAs are popular because they offer guaranteed growth on your investment, and generally speaking, they have higher rates of return than CDs or savings accounts.
There are a few advantages of FIAs: Guaranteed Growth: With an FIA, you can be sure that your money will grow at a set rate, regardless of how the stock market performs. Tax Advantages: Contributions to FIAs are tax-deductible, and the earnings grow tax-deferred. Safety and Security: The regulated nature of annuities gives investors a sense of security knowing their money is in good hands.
While there are a few good things to be said about FIAs, there are also a few potential drawbacks: Risk of Market Drop: Investing in an FIA means you’re putting your money in the stock market, which is subject to rises and falls. Fees and Charges: FIAs often have higher fees than other investment options, so it’s important to compare costs before signing on the dotted line. Death Benefits May Not be Enough: Dying soon after investing in an FIA means your beneficiary may not receive enough money to cover the costs of your funeral and estate.
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.