Fixed indexed annuities: the index vs. what gets credited

An indexed annuity is sold on the index it follows. What reaches you is that index without its dividends, then capped, then reduced by any rider fee, then taxed as income. We measure each step in dollars.

Education only. We explain how these products work and what they cost. We do not sell or recommend securities.

How it is built

Bonds, options and a formula

Your money is not invested in the index. The insurer invests most of it in bonds and uses the interest to buy index options. What you are credited each year depends on a formula, and each part of the formula limits what reaches you.

FloorUsually 0%. In a down year you are credited nothing instead of a loss. This is the benefit the product is sold on.

Price index onlyCrediting follows the S&P 500 price index, not the total return. Dividends, about 2 points a year from 1999 to 2023, are gone before any cap applies.

CapThe most you can be credited in a year. From 1928 to 2023, 66% of all the market’s upside came above 8%, the part an 8% cap gives away.

Spread or participationSome contracts have no cap but subtract a spread from each gain, or credit only part of it.

Income riderAn optional guaranteed income benefit, typically 1% to 2% a year, often charged on a larger income base.

Tax on the way outGains are taxed as ordinary income, not at capital gains or qualified dividend rates, and there is no step-up in basis at death.

What caps really are

Lower than most illustrations

8.12%median S&P 500 one-year cap across 74 indexed annuities with 2026 rates (Retirement Literacy Foundation, Oct 2026)

1% or lessthe guaranteed minimum cap in 87% of contracts that publish one: how far the insurer can lower yours

Year 1 onlycaps reset each contract anniversary; only the first year’s is guaranteed

The case

$200,000 at 60, held to 85

A hypothetical 60-year-old man, through the real 1999–2023 market: two crashes early, the kind of start a floor is built for. Each step takes something.

Step	Value at 85	Lost at this step
S&P 500 total return, our gross: no fee, no tax	$1,236,646	—
The price index the annuity follows: dividends left out	$775,999	−$460,647
Credited with a 0% floor and an 8% cap	$676,534	−$99,465
With a 1% income rider	$526,223	−$150,311
After income tax on the gain at 22%	$454,454	−$71,769
From the gross to what is left		−$782,192 (63%)

Hypothetical. Historical S&P 500 price and total returns, 1999–2023; the annuity applies a 0% floor and 8% cap to price returns and does not represent any actual product. The annuity was ahead after the 2000–2002 and 2008 declines; the index stayed ahead from 2013 on.

The Annuity Drag Series

Three short guides, one case

No. 1 · PDF · 8 pages

The index vs. what gets credited

$454,454

left at 85 from a $1,236,646 gross, after the cap, the missing dividends, a 1% rider and income tax.

Read No. 1 → No. 2 · PDF · 5 pages

The lost opportunity cost

$642,856

each year’s drag compounded at a fixed 5% to age 85; $710,423 at the S&P 500.

Read No. 2 → No. 3 · PDF · 6 pages

Annuity rescue

$601,628

to the family at 85 by dropping the rider and moving $15,000 a year into whole life, against $454,454 staying put.

Read No. 3 →

Caution

A rescue into indexed or universal life is not the same rescue

Moving annuity money into indexed universal life brings the cap back, now inside a policy whose insurance charges rise every year and steeply after 80, with little guaranteed. If crediting falls short, the policy can lapse when the coverage is needed most.

The Back-End Squeeze: whole life vs. indexed UL (PDF) →

If you own one

Questions to ask

Does my strategy credit the price index or the total return?
What is my cap today, what was it at purchase, and what is the guaranteed minimum?
What does my income rider cost, and is the fee charged on the account value or the income base?
Can the rider be dropped, and what do I give up if it is?
When does my surrender period end, and how much can I take out free each year?
How will the gain be taxed when I take it out, or when my heirs inherit it?

Own an indexed annuity? Bring the contract and your latest statement to a product review. We will walk through the crediting, the fees and the tax with you. We do not recommend buying, selling or replacing any contract. Schedule a product review → All by-products →

Advanced Capital & Investments pages are for education only. Nothing here is an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or investment strategy, and we do not sell securities through this site. Examples are hypothetical, do not represent any actual product and do not reflect taxes unless stated. Investing involves risk, including loss of principal. Before investing in any fund, read its prospectus and talk with a properly registered professional. Annuity and life insurance guarantees are based on the claims-paying ability of the issuing insurer. Any replacement or exchange should be reviewed for surrender charges, lost benefits and suitability. Sources for cap data are listed in No. 1.