What is the primary difference between fixed annuities and index annuities?

The primary difference between fixed annuities and index annuities lies in how the interest credited to the annuity is calculated.

Fixed annuities offer a guaranteed fixed interest rate over the life of the contract. This means that the policyholder can expect a predetermined interest rate with a consistent return on their investment, regardless of market fluctuations.

In contrast, index annuities, also known as equity-indexed annuities, link the interest credited to the performance of a specific market index, such as the S&P 500. This means that the interest earned can vary based on the performance of that index, allowing for the potential for higher returns when the index performs well. However, index annuities often come with caps on the maximum interest that can be earned, protecting the insurance company while allowing policyholders to benefit from market gains up to a certain level.

This distinction in interest calculation reflects the overall risk and potential reward associated with each type of annuity, making it crucial for individuals to understand these differences when considering their investment options.