Fixed index and variable annuities are popular tools for investors seeking additional income. Both offer unique benefits but differ significantly in terms of risk, return, and structure.

This guide explores everything you need to know about fixed index annuities versus variable annuities, helping you make an informed decision for your financial future.

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What’s a fixed index annuity?

Fixed index annuities (FIAs) are tax-deferred insurance products. You pay acontribute a lump sum or a series of payments to an insurance company., This type of annuity offers protection against market losses and the potential for interest earnings based on an underlying stock market index, such as the S&P 500.and they add interest to your account based on an index’s performance, such as the S&P 500. Essentially, they link their potential earnings to the index, but the actual interest credited to the annuity is subject to factors like caps, participation rates, and spreads, which can restrict the upside potential. 

Investments may be subject to earnings caps, but providers also usually protect your principal from large losses. Imagine the insurer lets you earn up to 8% and won’t let the investment earnings drop below 0%. If the S&P 500 increases by 10%, you’ll only add 8% interest to your annuity. But if the market goes down, you won’t lose any of your initial fundscontribution.

What’s a variable annuity?

Variable annuities are also insurance contracts, but they offer investors direct market exposure through subaccounts. These investment options can include stocks, bonds, and money market funds.The subaccounts can come in a wide array of asset classes, such as stock funds, bond funds and money market funds. The performance of these sub-accounts directly impacts the value of your annuity, potentially leading to gains or losses

But with increased market exposure comes higher risk. A variable annuity’s value fluctuates based on the performance of these underlying investment optionss, offering higher growth potential but also exposing you to loss during a market downturn.

What’s the difference between a variable annuity vs. a fixed index annuity?

These two investment vehicles have opposite earning structures. While variable annuities invest your funds directly into the marketinvest in sub-accounts and subject your earnings to market conditions, and generally do not offer any principal protection (without the inclusion of a rider), fixed index annuities offer a single interest rate for the account’s lifetime. You’ll always earn set interest, regardless of market or index performance.generally offer principal protection. A Fixed index annuity earnings is tied to an underlying market index, so when the index rises, so do your gains, up to a limit outlined in your contract, which could include features such as rate caps, spreads, and/or participation rates. On the other hand, if the index falls, your principal is protected from losses.

Fixed index vs. variable annuities: Top differences

Consider these key differences when crafting your investment strategy.

Risk and return

• Fixed index annuities are lower-risk investments offering a guaranteed minimum interest rate while prioritizing principal protection.  While a fixed index annuity earnings are linked to the index, your funds are not directly invested in the market, and therefore the insurance company can provide principal protection from market losses. This makes them less risky than variable annuities.
• Variable annuities, on the other hand, carry higher risk due to direct market exposure. They come with the potential for both significant gains and losses.

Market exposure

• Fixed index annuities offer indirect exposure to the markets. You earn interest based on index performance, but you don’t lose money in the event of a market downturn. 
• Variable annuities invest directly in market-based subaccounts, fully exposing your funds to fluctuations.

Principal protection

• Fixed index annuities focus on principal protection, ensuring your initial investment remains safe from market downturns.
• Variable annuities offer no protection, and your principal can decline significantly if your chosen investments perform poorly. 

Cost and fees

• Fixed index annuities typically have lower costs. That said, you may be subject to participation rates that limit returns and surrender charges for withdrawing money early. 
• Variable annuities tend to have a wider array of fees, including mortality and expense charges, administrative fees, and subaccount management costs. These quickly add up and can erode returns over time.

Payout predictability

• Fixed index annuities provide more predictable payouts due to earnings caps and downturn protection. You’ll still accumulate varying interest, but it’s within set limits.
• Variable annuities base payouts on investment performance, making them less predictable but potentially more lucrative.allowing for higher payout amounts if the market performs well.

Growth potential

• Fixed index annuities limit growth through caps or participation rates, resulting in more modest returns.
• Variable annuities offer greater growth potential due to their direct market exposure, especially when conditions are favorable. 

Customization options

• Fixed index annuities don’t invest your funds directly. Instead, the insurance company holds your money and bases returns on a single index’s performance.growth on the performance of the index it is tracking.
• Variable annuities allow you to customize your investments much more. You select from a range of subaccounts that best match your risk tolerance and financial goals.

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Fixed index vs. variable annuities: Pros and cons

Here’s a breakdown of the pros and cons of each annuity type. 

Fixed index annuity Pros

• Principal protection 
• Predictable returns
• Lower risk

Variable annuity Pros

• Higher growth potential
• Investment flexibility

Fixed index annuity Cons

• Capped returns
• Lower growth potential

Variable annuity Cons

• Market risk
• Higher fees
• No guaranteed returns

For investors who like the features of both options, an indexed variable annuity offers a hybrid approach. It offers market-linked growth potential tied to an index and typically may includes some level of principal protection from market downturns. You may also face caps on potential gains.

Variable annuity vs. mutual fund

While variable annuity subaccounts function similarly to mutual funds, there are some key differences to note:

• Investment process: A variable annuity is an insurance contract, and the provider insurer invests your funds into subaccounts and the value of your contract fluctuates based on the subaccounts you selectso you earn interest. Mutual funds pool your money with other investors' capital to purchase a diversified portfolio of stocks, bonds, or other assets.
• Taxation: Annuities are tax-deferred, meaning you only owe taxes once you start taking distributions. Mutual funds may be subject to yearly dividends and capital gains taxes, depending on how you hold these investments.
• Additional features: You can customize annuities using contract add-ons called riders. Benefits range from guaranteed lifetime payments to cost-of-living adjustments. Mutual fund owners don’t have access to riders.
• Liquidity: Annuities are typically intended for long-term growth, so invested funds aren’t too easilty accessible. But some providers insurers have products that allow you to withdraw up to 10% per year without penalties, giving you more flexibility. Mutual funds are highly liquid — you can sell most holdings whenever you’d like.

Explore annuity options with Gainbridge

Choosing between a fixed index and a variable annuity depends on your risk tolerance and financial goals. For those seeking a balanced approach with principal protection and growth potential, consider Gainbridge’s modern annuities. They’re designed to offer competitive returns while safeguarding your investment from downturns and hidden fees.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.

Fixed index annuities don't directly invest in the market. Instead, they use a crediting method tied to the performance of a chosen market index (or indices) over a specific period.

Annuities offered through Gainbridge Life Insurance Company, Zionsville, Indiana.