Declared rate or indexed: the two kinds of fixed annuity
Neither one loses principal to the market. What differs is how the interest gets credited — and what caps and participation rates take out of it.
A fixed annuity does not lose value when an index falls; the insurer carries that risk. Within that guarantee, contracts split into two kinds, and the dividing line is simply what the credited interest is tied to.
Multi-year guaranteed annuity — the number is set in advance
The insurer declares a term and a rate, and credits exactly that: five years at 3.5%, for instance, so you can calculate the ending balance on day one. It is often compared to a CD, with two differences — the growth is tax-deferred, and leaving early triggers a surrender charge.
Indexed annuity — interest tied to an index
In an up year, interest is credited by a defined formula. In a down year, the credit is 0% and principal does not fall. The real question is how much gets credited in the good years, and that is where the cap rate and participation rate come in. With a 9% cap and an 80% participation rate, a 20% index year credits 9%. Index dividends are typically excluded as well.
| Index move | Declared 4% | Indexed · 9% cap |
|---|---|---|
| +20% | +4% | +9% |
| +6% | +4% | +6% |
| −15% | +4% | 0% |
The shape is clear enough: an indexed contract gives up the great years to protect the bad ones, while a declared rate pays the same number either way. The figures above are illustrative, not the terms of any particular contract.
Two lines to find in the contract
- Whether the cap and participation rate can change — locked for the term, or reset by the insurer each year
- The guaranteed minimum rate — the floor the contract owes you if those terms get worse
An income rider guarantees lifetime withdrawals without annuitizing, for an extra annual fee. Watch one detail: the “benefit base” used to calculate those withdrawals is not money you can walk away with. Any illustration that blurs the two is worth a second look.