An indexed annuity (also called a fixed indexed annuity or equity-indexed annuity) is an insurance product that links credited interest to the performance of a market index (commonly the S&P 500) while guaranteeing the policyholder's principal against loss. It occupies a middle ground between fixed annuities (guaranteed rate) and variable annuities (market exposure with no floor).
The credited interest is subject to limitations that reduce the investor's share of index gains: a cap rate (maximum annual return credited, e.g., 6%), a participation rate (percentage of index gain credited, e.g., 80%), or a spread/margin (index gain minus a percentage). In exchange, the policyholder faces no direct downside from market losses — the worst outcome is typically a 0% return in a down year.
The regulatory status of indexed annuities is nuanced. Most fixed indexed annuities are regulated solely as insurance products under state law and are NOT registered as securities (sellers need only a state insurance license). However, registered index-linked annuities (RILAs) — which allow partial downside exposure (a "buffer" or "floor") — ARE securities and require a securities registration.
Indexed annuities are complex products. The combination of caps, participation rates, averaging methods, and surrender charges makes it difficult to evaluate true expected returns.
> Exam tip: On the Series 6/7 and Series 65/66, know that traditional fixed indexed annuities are generally NOT securities (insurance license only), but RILAs ARE securities. This distinction appears on exams. Understand how caps and participation rates limit upside. Suitability is a critical concern: long surrender periods, complexity, and the fact that credited rates can change annually make these products potentially inappropriate for many investors.