The basics
What is a fixed indexed annuity?
A fixed indexed annuity (FIA) is a fixed annuity that credits interest based partly on the performance of an external market index, such as the S&P 500. The client is not directly invested in the stock market.
- If the index performs well, the client may receive interest based on the product's crediting method.
- If the index performs poorly, the client receives 0% interest for that period but does not lose principal due to market decline.
- Interest, once credited, is generally locked in and protected going forward.
- Common crediting levers include caps, participation rates, spreads, fixed accounts, annual point-to-point, and performance triggers.
How it flows
From index return to protected value.
Index returnover the crediting period
Crediting methodcap, par rate, or spread
Interest credited0% floor on market loss
Protected account valuelocked-in gains
Crediting methods in numbers
Three simple examples
The same index move can credit differently depending on the method.
Example 1 · Cap
S&P 500 annual point-to-point, 10% cap.
Index up 7%Client earns 7%
Index up 14%Client earns 10%
Index down 12%Client earns 0%
Example 2 · Participation
80% participation rate.
Index up 10%Client earns 8%
(10% × 80%)= 8%
Index downClient earns 0%
Example 3 · Spread
2% spread.
Index up 10%Client earns 8%
(10% − 2%)= 8%
Index downClient earns 0%
Teaching point
Caps, participation rates, and spreads are three different ways a carrier shares index growth. Knowing which one a product uses is the key to setting honest client expectations.
Examples are hypothetical and for educational purposes only. They are not a prediction or guarantee of future results. Actual results depend on product terms, the chosen index and crediting method, caps, participation rates, spreads, fees, and the period measured, and vary by carrier, state, and contract. This is not legal, tax, investment, or compliance advice. Guarantees are based on the claims-paying ability of the issuing insurance carrier.
Designing an FIA case?
Request an illustration and we will help you compare crediting methods side by side.