Fixed vs. Variable vs. Indexed Annuities
Fixed, variable, and indexed annuities are all contracts with an insurance company, but they grow your money in very different ways and carry different levels of risk. This page compares the three so the trade-offs are easier to see.
At a glance
| Fixed Fixed | Variable Variable | Indexed Indexed | |
|---|---|---|---|
| How your money grows | A guaranteed interest rate set by the insurer | Based on the investment subaccounts you choose | Tied to a market index, with limits on gains and losses |
| Risk to your principal | Very low; principal is guaranteed by the insurer | Yes; value can fall if investments decline | Limited; a floor usually protects against index losses |
| Growth potential | Lowest and most predictable | Highest, but not guaranteed | Moderate; capped by rate caps or participation rates |
| Typical fees | Few or none; built into the credited rate | Higher; mortality, administrative, and subaccount fees | Moderate; often expressed through caps rather than direct fees |
| Who regulates it | State insurance departments | State insurance departments plus the SEC and FINRA | State insurance departments |
How the three approaches differ
A fixed annuity credits a guaranteed interest rate set by the insurer, so growth is steady and the principal is protected. A variable annuity puts your money into investment subaccounts you choose, so the value can rise with strong markets or fall when investments decline.
An indexed annuity sits between the two. Its growth is tied to a market index, but the insurer limits the upside with a cap or participation rate and limits the downside with a floor that usually prevents index-related losses.
Guarantees versus growth potential
In general, more principal protection comes with lower growth potential, so a fixed annuity offers the most certainty and a variable annuity the most upside, with indexed products aiming for a middle ground.
The annuity contract
The annuity contract is the binding document that states the guaranteed rate, any caps or participation rates, and the surrender charge schedule.
The prospectus or disclosure statement
A variable annuity comes with a prospectus, and fixed or indexed products include a disclosure statement that details fees, subaccounts, and how interest is credited.
The illustration
An illustration shows hypothetical values under different scenarios, which helps clarify how caps, floors, and fees would affect the balance over time.
What it looks like on a real claim
Example 1 — A year the market rises
The market index gains 12% over one year on a $100,000 annuity.
Credits its guaranteed rate, for example 4%, adding $4,000 regardless of the market.
Could gain close to 12% before fees if the subaccounts track the index.
Credits gains up to its cap, for example 8%, adding $8,000.
Example 2 — A year the market falls
The market index drops 15% over one year on the same $100,000.
Still credits its guaranteed rate, so the balance grows.
Can fall roughly in line with the subaccounts, reducing the principal.
The floor, often 0%, protects the principal, so the balance holds steady.
The bottom line
The right fit depends on how much market risk you are comfortable taking in exchange for growth. Fixed annuities emphasize certainty, variable annuities emphasize potential, and indexed annuities try to balance the two.
Because the details of caps, floors, and fees vary widely from one contract to the next, comparing the actual contract and illustration is the only way to know how a specific annuity would behave.