Before we describe fixed index annuities, let’s review the basics of annuities. Basically, there are four types of annuities: immediate, fixed, variable and fixed index. All annuities are an insurance contract between an individual and a financial institution. The individual pays a premium that will, at a predetermined time, be returned back to the individual as incremental payments or as a lump sum. In most cases, any principal paid into an annuity is tax deferred.

So what are a few of the differences with fixed index annuities? This type of annuity accumulated interest based on the performance of a specific financial index, such as Nasdaq or the S&P 500. With a flexible interest rate, there is more risk with this annuity, along with greater potential for more growth opportunities. Most types of financial vehicles meant for retirement pay back the premium plus a small amount of interest. Fixed index annuities have the potential to earn a higher, market-linked interest rate with less exposure to risks associated with the stock market because although an external index or indexes may affect policy values, the policy does not directly participate in any stock or equity investments.