By Christian BrinkleyLicensed NC Insurance Agent, NPN 22217190, NC Life & Health · Updated November 7, 2026 · 4 min read
A fixed annuity pays a stated rate. An indexed annuity credits interest from a market index, with limits. The two look nothing alike on paper, and they are not alike. One trades growth for certainty. The other trades some upside for protection. Here is how each one works, so you can see which trade fits you.
The one difference that matters
A fixed annuity credits interest at a rate the contract states, for a set term. A multi-year guaranteed annuity, often called a MYGA, is the common form: you know the rate, you know the term, and the insurer carries the risk. A fixed indexed annuity credits interest based on a market index, such as the S&P 500, and the credit is limited by a cap, a participation rate, or a spread. The index can rise and your credit can still be small. That is the tradeoff.
Both are insurance contracts, not bank deposits, and neither is FDIC-insured. Both grow tax-deferred until you take money out. The difference is only how the interest is figured.
How caps and participation rates work
Three terms decide what an indexed annuity credits. A cap is the most you can be credited in a period. A participation rate is the share of the index gain you receive. A spread is an amount taken off the gain before crediting. A contract uses one or more of these, and the figures can change from one period to the next.
| If the index gains 10% in a year | What a $100,000 contract is credited |
|---|---|
| Cap of 6% | $6,000, for a value of $106,000 |
| Participation rate of 80% | $8,000, for a value of $108,000 |
| Spread of 2% | $8,000, for a value of $108,000 |
| Index falls 12% | $0, and the value stays $100,000 before any fees or riders |
This example uses round numbers to show the mechanics. It is not a real contract, and no contract promises these credits. Caps, participation rates, and spreads vary by contract and by period, so read the ones in the contract in front of you.
What happens when the index falls
When the index falls, a fixed indexed annuity typically credits zero for that period rather than a negative amount. The principal is protected from market loss. That protection is real, and it is the reason many people choose this type. The cost is the cap: in a strong market year, the credit stops at the cap while the index keeps rising. Over many years, the credited interest usually lands well below the index return itself.
A fixed annuity has no such tradeoff. The rate is the rate, in up years and down years alike. The risk is different: if prices rise faster than the rate, the money loses buying power, and if rates rise elsewhere, your money is locked at the old rate until the term ends.
Surrender periods and access to your money
Both types usually carry a surrender charge period, often 5 to 10 years and sometimes longer. Taking out more than the contract allows during that period triggers a charge that declines over time. Many contracts allow a limited free withdrawal each year, and the contract states the amount.
Taxes add a second layer. Growth is tax-deferred, and withdrawals are taxed as ordinary income. A taxable withdrawal before age 59 and a half can face a 10 percent additional federal tax. Keep money you may need soon out of either type.
Who each one fits
A fixed annuity fits a saver who wants a stated rate, no surprises, and no market risk, and who can leave the money alone for the full term. An indexed annuity fits a saver who wants a link to market gains, accepts that the link is capped, and values principal protection more than the highest possible return.
Neither fits money you may need in the next few years, or a person whose main goal is growth. If you want market returns, ask a licensed securities professional, and compare investments on their own terms.
- Ask which figures are guaranteed and which are illustrated.
- Ask for the cap, participation rate, and spread in writing.
- Ask for the surrender schedule and the free withdrawal amount.
Questions people ask me about this
Which pays more, a fixed or an indexed annuity?
It depends on the years in question. A fixed annuity pays its stated rate every year. An indexed annuity can pay more in a strong year, up to its cap, and zero in a down year. Over time, the fixed rate is predictable and the indexed credit is not.
Can I lose money in a fixed indexed annuity?
Not from the market: a down year typically credits zero, so the principal is protected from market loss. Surrender charges, rider fees, and taxes can still reduce what you take out early.
Are caps and participation rates fixed?
No. They are set by the contract and can change from one crediting period to the next. Read the current figures in the contract, not the ones in an old illustration.
Can I switch from one type to the other later?
You cannot change a contract's type after it is issued. You can put new money into a different contract, but replacing an existing annuity can trigger surrender charges and taxes, so review the old contract before moving anything.