Indexed Annuites

What Is an Indexed Annuity? Growth Potential with Downside Protection

When it comes to retirement planning, most people are looking for three things: growth, protection, and guaranteed income.

If you want the potential to earn more than a traditional fixed annuity—without risking losses from a market downturn—an Indexed Annuity may be the perfect fit.

In this post, we’ll explain what Indexed Annuities are, how they work, and how they can play a key role in your long-term financial strategy.

What Is an Indexed Annuity?

An Indexed Annuity (also called a Fixed Indexed Annuity) is a type of annuity that offers:

Growth based on the performance of a stock market index (like the S&P 500)
Protection from market losses
The option to receive a guaranteed stream of income in retirement

Unlike variable annuities, indexed annuities do not invest directly in the market, meaning your principal is protected even if the index performs poorly.

How Does an Indexed Annuity Work?

Here’s a simplified breakdown:

You make a lump-sum payment (or series of payments) to an insurance company.
The insurer credits interest to your account based on the performance of a market index (e.g., S&P 500).
If the market index performs well, you earn interest up to a cap rate (maximum limit).
If the market index drops, your annuity is protected by a floor, usually 0%—meaning you don’t lose money.

You can defer income and allow your account to grow tax-deferred, or convert it into a guaranteed income stream when you’re ready.

Key Benefits of Indexed Annuities

Principal Protection

Even if the market declines, your account value won’t go down due to index performance.

Market-Linked Growth Potential

Earn interest based on the performance of a stock index—without investing directly in the market.

Tax-Deferred Growth

You don’t pay taxes on gains until you start withdrawing income, helping your money grow faster over time.

Guaranteed Lifetime Income Options

Convert your annuity into a pension-like income you can’t outlive.

No Direct Stock Market Risk

You’re not subject to the full volatility of market swings—ideal for conservative or near-retirement investors.

Indexed Annuity vs. Other Annuities

Feature	Fixed Annuity	Indexed Annuity	Variable Annuity
Growth Type	Fixed interest	Market-linked (indexed)	Market-based
Risk Level	Very low	Low to moderate	High (market risk)
Principal Protection	Yes	Yes	No
Upside Potential	Low	Moderate (capped)	High (unlimited, with risk)
Tax-Deferred Growth	Yes	Yes	Yes

Who Should Consider an Indexed Annuity?

You may want to consider an Indexed Annuity if you:

Want growth potential without risking your principal
Are approaching or in retirement
Need a guaranteed income stream
Have already maxed out other retirement savings options
Want to diversify your retirement strategy with market-linked but protected returns

Things to Consider

Cap rates may limit the maximum interest you earn
Some annuities have participation rates or spreads that reduce your credited interest
Surrender charges may apply for early withdrawals
Withdrawals before age 59½ may be subject to a 10% IRS penalty
Products and features vary by company—not all indexed annuities are the same

That’s why it’s important to work with a licensed insurance professional to understand the details and choose the best fit for your needs.