Indexed annuities let you participate in market gains while protecting your principal from losses. The best of both worlds for retirement savings.
Last updated: January 2026 | Written by licensed CT insurance professionals
Indexed vs. Fixed Annuities Comparison
Understand how indexed annuities compare to traditional fixed annuities
How Indexed Annuities Work
You make a deposit
Deposit a lump sum (typically $25,000+) into the annuity contract.
Interest is credited based on index performance
If the S&P 500 gains 10% and your cap is 7%, you earn 7%. If it loses 15%, you earn 0% (but don’t lose principal).
Your gains lock in annually
Interest credited becomes part of your protected principal. You can’t lose what you’ve earned.
Convert to income when ready
Take withdrawals or convert to guaranteed lifetime income in retirement.
Frequently Asked Questions
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Market-Linked Growth
Earn interest based on stock market index performance without direct market investment.
Downside Protection
Your principal is protected from market losses. When the market drops, you don’t lose money.
Participation in Gains
Capture a portion of market gains through caps, participation rates, or spreads.
Minimum Guarantees
Many contracts include a minimum guaranteed interest rate regardless of market performance.
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Expert Answers
What is a participation rate in indexed annuities?
A participation rate is the percentage of the market index gain that gets credited to your annuity. For example, if the S&P 500 gains 10% and your participation rate is 60%, you earn 6% interest. Participation rates vary by carrier and can change annually. Some indexed annuities offer 100% participation up to a cap, while others offer uncapped participation at lower rates.
What is a cap rate in indexed annuities?
A cap rate is the maximum interest you can earn in a crediting period, regardless of how well the index performs. For example, with a 7% cap, if the S&P 500 gains 15%, you earn only 7%. Caps protect the insurance company’s ability to guarantee principal protection. Higher caps generally mean higher potential returns but may come with lower participation rates or other trade-offs.
Can you lose money in an indexed annuity?
You cannot lose your principal in an indexed annuity due to market performance—your principal is protected by the insurance company. However, you can lose money to: 1) surrender charges if you withdraw more than allowed during the surrender period, 2) fees associated with optional riders, 3) purchasing power erosion due to inflation. Additionally, if you withdraw before age 59½, you may owe a 10% IRS penalty on gains.
How do indexed annuities work?
Your interest is credited based on the performance of a market index (like the S&P 500), subject to caps or participation rates. When the index goes up, you earn interest. When it goes down, you earn nothing (but don’t lose principal).
What’s a participation rate and cap?
A participation rate determines what percentage of index gains you receive (e.g., 50% means you get half the gain). A cap limits the maximum interest you can earn (e.g., 8% cap means even if the index gains 15%, you earn 8%).
Are indexed annuities risky?
Indexed annuities offer more potential than fixed annuities but less than direct stock market investment. Your principal is protected from market losses, so they’re considered lower-risk than stocks but with more upside than fixed annuities.
Who should consider an indexed annuity?
Indexed annuities suit those who want potential for higher returns than fixed annuities but want protection from market losses. They’re ideal for pre-retirees with 5-10+ years until retirement who want tax-deferred growth.