An equity-indexed annuity, also known as a fixed-indexed annuity, is a retirement product designed to offer a balance between security and growth potential. It functions as a hybrid between fixed and variable annuities, providing a minimum guaranteed return (like fixed annuities) while tying part of your earnings to the performance of a market index (like variable annuities).

Because of this structure, equity-indexed annuities typically appeal to retirement savers who want greater growth potential than traditional fixed annuities without taking on full market risk. In rising markets, they can offer more upside than a fixed annuity. In downturns, they can also provide downside protection. But the structure can be complex and is subject to caps, fees, and limitations that are important to understand before committing.

This article will explain what equity-indexed annuities are, how they can grow, and whether they’re a smart fit for your retirement goals.

{{key-takeaways}}

What is an equity-indexed annuity?

An equity-indexed annuity (EIA) is a type of fixed annuity that links your interest earnings to the performance of a market index. This structure protects your principal contribution from stock market losses, but you won't earn dividends or full returns. Instead, the insurer may caps your earnings based on a portion of the index’s gains, known as a participation rate.

In plain terms:

• If the index goes up, you get a share of the gains, within limits.
• If the index drops, your account doesn’t lose value.
• Either way, you have a floor (protection) and a ceiling (growth limit).

This makes EIAs a popular middle-ground strategy: You give up some of the upside in exchange for downside protection and guaranteed income options in retirement.

How do equity-indexed annuities grow?

EIAs are typically linked various indexes such as the S&P 500 but depending on the product, they may offer other indexes like the Nasdaq Composite and Dow Jones Industrial Average.

These types of annuities can grow interest based on stock market index performance and guaranteed interest protections. But how much you earn with an EIA — and when — depends on a few key features. Depending on the annuity there are a few different ways in which interest is credited:

• Participation rate: This determines the percentage of index gain you receive. For example, if your EIA has a 70% participation rate and the index gains 10%, your credited return would be 7%. The insurer sets the participation rate, which can change over time.
• Rate cap: Some contracts place a limit on your maximum returns, regardless of how well the index performs. So if your cap is 5% and the index gains 12%, your credited interest would still be capped at 5%.

Crediting methods

An insurer calculates and can pay interest to your annuity based on the crediting method the company or you decides to use. Common approaches include:

• Annual reset: This method compares the index value at the start and end of each contract year, locking in gains annually.
• Point-to-point: This measures changes between two fixed dates, often from one contract anniversary to the next. 
• High-water mark: This tracks the index's highest value during the contract term and compares it to the starting point to calculate gains.

Each method determines when you receive interest and how much you earn over time. Your EIA won't realize the stock market's maximum return, but it does offer the potential for steady growth with downside protection and can offer a predictable minimum return, even when the market underperforms.

Pros and cons of equity-indexed annuities

Equity-indexed annuities can work for people who want the potential for higher interest than a fixed annuity can offer — without being fully exposed to stock market risk. That balance of growth and protection is the appeal. But like any financial product, EIAs come with trade-offs.

Pros

EIAs may work wellas part of a comprehensive retirement strategy that focuses on ensuring you don’t outlive your money. Here are their main advantages:

• Downside protection: The annuity protects your principal from market losses so long as you hold the contract through the full term and don't make early withdrawals. This makes EIAs a lower-risk option for long-term savers.
• Guaranteed minimum return: Most EIAs include a minimum interest rate — often between 1% and 3% annually. This ensures growth even in flat or down markets, which is something traditional stock market investments can't offer. 
• Potential for higher growth than fixed annuities: One key benefit found in an EIA but not in a traditional fixed annuity is the ability to earn interest based on market performance. Fixed annuities offer a set rate, but EIAs let you benefit from market upswings, without direct exposure. 

Cons

Despite the upsides, EIAs may not be the best option for long-term savers. Consider the following disadvantages:

• Participation caps: A cap or participation rate may limit your returns, even if the index has a strong year. These limits are how insurance companies manage their risk and your upside.
• Complexity: EIAs can be challenging to understand. Contract elements you’ll have to be aware of include participation rates and insurer methods for calculating and crediting returns.
• Surrender charges: Withdrawing funds early can trigger surrender charges, especially in the contract's early years. These fees are often steep and can affect your principal and potential earnings. 
• Potential fees: Some EIAs come with costs like administrative fees and rider charges. These can impact your bottom line. 

Is an equity-indexed annuity right for you?

An equity-indexed annuity could be a fit if you’re a conservative-to-moderate investor seeking a blend of market upside and principal protection. 

For example, the Gainbridge OneUp™ is a five-year fixed-indexed annuity that credits your account with up to 60% of the S&P 500's gains alongside principal protection. It can be ideal if you want more growth potential than a fixed annuity without exposing your base contribution to market decline. 

The type of annuity you go with should align with your goals. Choose the structure that matches your appetite for returns, desire for security, and need for liquidity.

Grow your retirement savings with Gainbridge annuities 

If you seek long-term security, see if Gainbridge’s digital-first annuities are right for you. We never charge hidden fees or commissions, so unexpected costs won’t eat away at your growth or retirement income.

Explore a straightforward way to grow your money with Gainbridge.

‍This article is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes. Fixed index annuities are not securities and do not participate directly in the stock market or any index and are not investments. It is not possible to invest directly in an index.