Fixed vs variable vs indexed annuities: which is right for you?

Annuities are one of the most aggressively sold and most poorly understood financial products in America. The word "annuity" technically describes any contract that turns a lump sum into a stream of income — but in practice, the annuity industry sells three very different products under one name. Choosing between them is the single most important decision you will make about an annuity, and most buyers never even realize they had a choice.

Fixed annuities

A fixed annuity is the simplest version. You hand the insurance company a lump sum. They guarantee a fixed interest rate for a set number of years — typically 3, 5, 7, or 10 — and at the end of the term you can either take the money out, annuitize it into income, or roll it into a new contract. Your principal is protected. Your interest rate is locked. There are no market-linked surprises.

Who fixed annuities are for

Fixed annuities make sense for retirees who want a CD-like product with tax-deferred growth and a slightly higher rate than the bank. They are simple, predictable, and easy to compare across carriers. The trade-off is that the rate is fixed — if interest rates rise, you are stuck at the lower rate until the term ends.

Variable annuities

A variable annuity is essentially a tax-deferred investment account wrapped in an insurance contract. Your money goes into sub-accounts that look and behave like mutual funds — stocks, bonds, balanced portfolios. The value of your annuity moves with the market. If the market goes up, you make money. If it goes down, you lose money.

Most variable annuities come bundled with optional riders — guaranteed minimum income benefits, guaranteed minimum withdrawal benefits, enhanced death benefits — that cost an additional 1 to 1.5 percent per year. Combined with the underlying fund expenses and the contract fee, total annual costs on a variable annuity often exceed 3 percent.

Who variable annuities are for

Variable annuities make sense for a narrow group: investors who have already maxed out their 401(k) and IRA, who want additional tax-deferred growth, who plan to hold the contract for at least 15 to 20 years, and who genuinely value one of the income or death-benefit riders. For most buyers, the fees are too high to justify what the rider actually provides.

Indexed annuities

An indexed annuity (sometimes called a fixed indexed annuity or FIA) sits between fixed and variable. Your principal is protected — you cannot lose money to market downturns. Your interest is credited based on the performance of a market index like the S&P 500, but with two big catches: there is a cap on how much you can earn in any given year (often 5 to 8 percent), and there is usually a participation rate that limits how much of the index's gain you actually receive.

Who indexed annuities are for

Indexed annuities are pitched as "market upside with no downside." The reality is more nuanced: in strong market years you earn far less than the index, in flat years you earn nothing, and in down years you earn nothing — but you do not lose principal. They make sense for risk-averse retirees who want better-than-CD returns and are willing to accept long surrender periods and complex crediting formulas in exchange for principal protection.

Side by side

• Fixed: principal protected, interest rate guaranteed, lowest fees, lowest upside
• Indexed: principal protected, interest linked to a capped index, moderate fees, moderate upside
• Variable: principal at market risk, interest based on sub-account performance, highest fees, highest upside

Questions to ask before you buy any annuity

1. What is the total annual cost — contract fee, rider fees, and underlying fund expenses?
2. What is the surrender period and what are the surrender charges in each year?
3. If indexed, what is the cap, the participation rate, and the crediting method?
4. What is the carrier's financial strength rating (A.M. Best, Standard & Poor's)?
5. What is the death benefit if I die before annuitizing — and who is the beneficiary?
6. Can I make a 1035 exchange into this product to avoid taxes on a gain in an existing contract?

An annuity is a multi-decade contract. The fees, the surrender period, and the beneficiary designation all matter as much as the headline rate.

Track every contract in one place

Most annuity owners eventually own more than one — a fixed annuity from one rollover, an indexed annuity bought later, a small variable contract from years ago. Each one has its own carrier, contract number, surrender schedule, and beneficiary. EverKeep gives you one place to track all of them, so when you compare what you have or update a beneficiary, you do it once, across every policy, instead of hunting through filing cabinets.