Fixed Annuity vs. Fixed Indexed Annuity: What's the Difference?
What is a fixed annuity?
A fixed annuity is an insurance contract that credits interest at a rate set by the insurer. The most common version today is the multi-year guaranteed annuity (MYGA), which locks one interest rate for a set term, often 3 to 10 years. According to the NAIC Buyer’s Guide to Deferred Annuities, “fixed annuities guarantee your money will earn at least a minimum interest rate,” and the insurer may credit more than that minimum.
Fixed-rate deferred annuities are popular. LIMRA reported on February 12, 2026, that U.S. fixed-rate deferred annuity sales rose 5% to $160.6 billion in 2025.
What is a fixed indexed annuity?
A fixed indexed annuity is a type of fixed annuity that credits interest based on changes in a market index, such as the S&P 500. The NAIC Buyer’s Guide to Deferred Annuities states that the index-linked rate “is guaranteed to never be less than zero, even if the market goes down,” and that “when you buy an indexed annuity, you aren’t investing directly in the market or the index.”
The interest an FIA credits is limited by terms the insurer sets:
- Cap rate: the maximum interest the annuity can credit for an index period.
- Participation rate: the share of the index change used to calculate interest. The NAIC guide notes participation rates “are often less than 100%, particularly when there’s no cap rate.”
- Spread or margin: a percentage subtracted from the index change before interest is credited.
- Fixed account option: most FIAs also offer a declared-rate bucket, so you can split money between fixed and index-linked crediting.
LIMRA reported that U.S. fixed indexed annuity sales were $128.2 billion in 2025, 1% higher than in 2024.
How do fixed annuities and FIAs compare side by side?
| Feature | Fixed annuity (MYGA) | Fixed indexed annuity (FIA) |
|---|---|---|
| How interest is credited | Declared rate set by the insurer | Formula tied partly to a market index, plus an optional fixed account |
| Predictability | You know the rate for the full guarantee term | Credited interest varies year to year |
| Down-market years | Declared rate still credited | 0% floor: no index-linked interest, but no loss from index declines |
| Upside potential | Limited to the declared rate | Limited by caps, participation rates or spreads |
| Can terms change? | Rate locked for the guarantee term; renewal rate set after | Caps and participation rates are often reset each period, within contract minimums |
| Typical surrender period | Often matches the rate-lock term (commonly 3–10 years) | Often 5–10+ years |
| Free withdrawals | Commonly up to 10% a year (varies) | Commonly up to 10% a year (varies) |
| Optional income riders | Rare | Common, usually for an added annual fee |
| Complexity | Simple | Moderate to high |
Typical ranges as of October 2026; terms vary by insurer and contract. Read the contract and disclosure before buying.
How would each one credit interest? (Hypothetical example)
Here is a hypothetical example to show the mechanics. It does not reflect any specific insurer, product or current rate.
Suppose two people each place $100,000 in an annuity.
- Person A buys a fixed annuity with a hypothetical 4.5% declared rate locked for five years. Each year the contract credits 4.5%, whatever the market does.
- Person B buys an FIA with a hypothetical 9% annual cap on an index strategy.
| Hypothetical index change for the year | Person A (4.5% fixed) | Person B (9% cap, 0% floor) |
|---|---|---|
| Index up 15% | 4.5% credited | 9% credited (capped) |
| Index up 5% | 4.5% credited | 5% credited |
| Index down 12% | 4.5% credited | 0% credited (floor) |
Hypothetical illustration only. Not a projection of future results. Index-linked crediting formulas, caps and rates vary and can change.
The pattern is the point: the fixed annuity wins in flat and down years, the FIA can win in moderately strong years, and neither ever passes along the full index gain.
What do both types have in common?
Fixed annuities and FIAs share several features, and these matter as much as the differences:
- Principal protection from market declines. Neither credits negative interest because an index fell. Surrender charges and rider fees can still reduce what you get back if you leave early.
- Tax deferral. Interest generally grows tax-deferred until withdrawn. Withdrawals of earnings are taxed as ordinary income, and the NAIC guide notes you “may have to pay a 10% tax penalty if you withdraw money before you’re age 59½.” This is not tax advice.
- Surrender charges. The NAIC guide explains that a surrender charge applies if you take out more than the free amount during the surrender period, and the charge usually declines each year.
- Free-look period. The NAIC guide says many states give you “usually 10 to 30 days” to cancel after you receive the contract.
- Minimum guaranteed values. State nonforfeiture laws, based on NAIC Model Law 805, set minimum values that deferred annuities must provide.
- Insurer-backed guarantees. Every guarantee depends on the claims-paying ability of the issuing insurer, so the insurer’s financial strength matters.
- Lifetime income options. Either type can be annuitized into guaranteed income later.
Which one fits which goal?
The right choice depends on what you need the money to do:
- You want a known rate for a set number of years (similar to how many people use CDs): a fixed annuity or MYGA is usually the simpler fit.
- You are 5 to 10 years from needing the money and want growth potential without index losses: an FIA can fit, if you accept that some years will credit 0%.
- You want guaranteed lifetime income starting later: an FIA with an income rider is commonly used for that, but compare the rider fee and payout terms carefully.
- You value simplicity above all: a fixed annuity has fewer moving parts and fewer terms that can change.
Many people own both, using a MYGA for a short-term, predictable bucket and an FIA for longer-term money.
What questions should you ask before buying either one?
- How long is the surrender period, and what is the charge each year?
- How much can I withdraw each year without a charge?
- Is there a market value adjustment (MVA)?
- For an FIA: what are the current cap, participation and spread terms, and what are the contractual minimums they can drop to?
- For a fixed annuity: what happens to my rate when the guarantee period ends?
- Are there rider fees, and what do they buy?
- What is the insurer’s financial strength rating?
Who this is NOT for
A fixed annuity or FIA is probably not the right fit if:
- You may need most of the money within the surrender period. Early withdrawals above the free amount can cost you surrender charges.
- You have not yet built an emergency fund.
- You want market returns. Neither product passes along the full gain of an index, and neither is an investment.
- You are under 59½ and expect to withdraw earnings early, which can trigger a 10% IRS penalty on top of income tax.
- You want something you never have to think about again. FIA terms reset, and fixed annuity rates renew, so both deserve a periodic review.
If you are weighing a fixed annuity against an FIA, or wondering whether an annuity you already own still fits, a 20-minute conversation can sort out the tradeoffs for your situation. Schedule a free call.
FAQ
Is a fixed indexed annuity better than a fixed annuity? Neither is better in general. A fixed annuity is better for a known, locked rate; a fixed indexed annuity is better for someone willing to accept 0% years in exchange for the chance at higher credited interest in other years.
Can you lose money in a fixed indexed annuity? A fixed indexed annuity does not credit negative interest when its index falls, because of the 0% floor. You can still receive less than you put in if you surrender early and pay surrender charges, or if rider fees are deducted.
Is a MYGA the same as a fixed annuity? A multi-year guaranteed annuity (MYGA) is a type of fixed annuity that guarantees one declared interest rate for a set multi-year term. Some fixed annuities instead guarantee a rate for only the first year.
Do fixed indexed annuity caps change? Yes. Insurers commonly reset caps, participation rates and spreads at the start of each crediting period, but cannot go below the minimums written into the contract.
Are annuities FDIC-insured? No. Annuities are insurance contracts backed by the issuing insurer’s claims-paying ability, and each state’s life and health insurance guaranty association provides limited additional protection under state law.
Can I move money from one annuity to another without paying taxes? Generally yes, through a tax-free exchange under Internal Revenue Code Section 1035, but surrender charges on the old contract can still apply and a new surrender period starts. This is not tax advice.
Not sure whether a fixed annuity, an FIA or a mix fits your money? Brandon will walk through the tradeoffs with you by phone or video, wherever you live, at no cost. Schedule a free call.
Sources
- NAIC, Buyer’s Guide to Deferred Annuities (2013), via New Jersey Department of Banking and Insurance: https://www.nj.gov/dobi/division_insurance/pdfs/naicdeferredannuities.pdf
- LIMRA, “U.S. Retail Annuity Sales Top $460 Billion in 2025, Marking Fourth Year of Record Sales,” February 12, 2026: https://www.limra.com/en/newsroom/news-releases/2026/limra-u.s.-retail-annuity-sales-top-$460-billion-in-2025-marking-fourth-year-of-record-sales/
- NAIC, Standard Nonforfeiture Law for Individual Deferred Annuities (Model 805): https://content.naic.org/sites/default/files/model-law-805.pdf
Brandon Lenhoff is a licensed insurance agent and the owner of Lenhoff Financial Inc. in Lincoln, Nebraska. His team helps families across the U.S. evaluate Indexed Universal Life, fixed indexed annuities and other life insurance solutions, and reviews existing policies.
Brandon Lenhoff is a licensed insurance agent with Lenhoff Financial Inc. Insurance products only; this article is for educational purposes and is not tax, legal or investment advice. Guarantees are backed by the claims-paying ability of the issuing insurer.