How a fixed indexed annuity works and why your money is safe

By Jason Kestler

Kestler Financial Group, Inc.


This article provides a primer on the safety features included in fixed indexed annuities and how they compare to other annuities.

A lot of people wonder if their money is really safe when they put that money in an annuity.

To ensure the safety of your money from market volatility, the first thing you have to do is look at the type of annuity you are considering purchasing. The type of annuity that we are discussing is a fixed indexed annuity, and money is protected from market losses in a fixed indexed annuity. The carrier that issues the annuity guarantees that your contract value never falls due to the associated index falling.

Contract value

The money you put in the annuity becomes the initial contract value. The only way the contract value can go down is if you withdraw money from the annuity, so let’s assume you make no withdrawals. Even if every financial market in the country plummets, your contract value stays exactly the same. It doesn’t decline.

Also, depending on the time commitment you are willing to make, some carriers offer products with a premium bonus that can be credited to your contract value as well. Currently, available premium bonuses can range from 5 percent to 11 percent of the amount you put into your annuity.

Then, the annuity credits interest, typically annually on contract anniversaries. There is an index upon which interest crediting is based, and if that index goes up, interest is credited, and once it is credited, it becomes a protected part of the contract value as well.

So as anything is added to the contract value, whether it is the initial premium, any subsequent premiums, any premium bonus or any subsequent interest credits, they are all contractually protected from loss due to fluctuations in the associated index by the issuing carrier. That’s what makes fixed indexed annuities so attractive and so safe.

Fixed indexed annuity versus variable annuity

Don’t confuse a fixed indexed annuity with another type of annuity called a variable annuity. If you know anyone who has lost money in an annuity, chances are it was in a variable annuity. Variable annuities are only sold by securities representatives, and unlike a fixed indexed annuity, a variable annuity is actually invested in the stock and bond markets where the principal is at risk to loss.

So picking the right kind of annuity is a key part of making sure your money is safe from market losses and productive without excessive fees.
Annuity carrier

The other element of safety is the annuity carrier. You need to keep in mind that a promise of safety is only as strong as the carrier making the promise. Thus, you want to do some research to make sure that your annuity carrier is financially strong. Fortunately, there are independent companies, such as A.M. Best, Standard & Poor’s, Moody’s, and Fitch that analyze the strength of annuity carriers and publish their findings. Guarantees provided by annuities are subject to the financial strength of the issuing insurance company. Annuities are not guaranteed by any bank or the FDIC.

With a fixed indexed annuity, you are getting contractual guarantees, and such guarantees from a strong annuity carrier mean that your money is safe in a fixed indexed annuity.