9.2 Fixed, Indexed, and Variable Annuities

Three Product Families

Annuities are classified by how interest or growth is credited and by who bears the investment risk.

This table is the backbone of most exam questions. Memorize that variable annuities are securities requiring a prospectus and a securities registration in addition to a life insurance license. The pivot point in every question is the account that backs the contract: the general account (insurer's own pooled assets, conservative, guaranteed) versus the separate account (segregated investment subaccounts whose performance flows directly to the owner).

Fixed Annuities

A fixed annuity credits a guaranteed minimum interest rate (the floor the contract can never pay less) and often a higher current rate set periodically. Assets back the contract through the insurer's general account, so the insurer takes the investment risk and the owner enjoys principal protection.

Subtypes:

• Single Premium Deferred Annuity (SPDA): one lump sum, growth deferred to a later payout.
• Multi-Year Guaranteed Annuity (MYGA): locks the current rate for a set term (e.g., 5 years), much like a bank certificate of deposit.

The trade-off is purchasing power: a level fixed payout loses value to inflation over a long retirement unless an inflation feature is added. Because the insurer guarantees both principal and a minimum rate, fixed annuities appeal to conservative, risk-averse buyers, but they typically credit less than market-linked products over time.

Worked example: A $50,000 SPDA guarantees a 4% current rate for one year. After 12 months the account holds $52,000, all of which grows tax-deferred no 1099 is issued until money is withdrawn.

Variable Annuities

A variable annuity invests premium in subaccounts inside the insurer's separate account. Returns rise and fall with the chosen funds, so the owner bears investment risk there is no guaranteed account value unless a rider is purchased.

Because performance depends on securities, a variable annuity is a security and an insurance product simultaneously. The producer must hold a life insurance license and a FINRA registration (typically Series 6 or 7 plus Series 63), and a prospectus must be delivered no later than at solicitation. Sales are subject to suitability and FINRA conduct rules in addition to state law. The separate account is not part of the insurer's general creditors' claims, which protects subaccount assets but also means no guarantee of value.

Exam Tip: If a question mentions "separate account," "subaccounts," or "prospectus," the answer involves a variable annuity. Variable contracts charge mortality-and-expense (M&E) fees, administrative fees, and subaccount management fees that fixed products lack.

Fixed Indexed Annuities (FIA)

A fixed indexed annuity is a fixed annuity whose interest is linked to an external index (commonly the S&P 500) without direct market participation. It offers a 0% floor principal is not lost in a down year while sharing limited upside through crediting controls:

• Participation rate: the percentage of the index gain credited (e.g., 80%).
• Cap: the maximum credited rate (e.g., 9%).
• Spread/margin/asset fee: a percentage subtracted from the index gain (e.g., 2%).

Worked example (cap): Index rises 12%; cap is 9% credited = 9%. Worked example (participation): Index rises 12%; 80% participation = 9.6%. Worked example (spread): Index rises 12%; 2% spread = 10%. Down-year example: Index falls 8%; the floor applies credited = 0%, principal preserved.

Indexed annuities also use crediting methods such as annual point-to-point, monthly averaging, or monthly sum to measure the index change. Because actual returns hinge on these levers, regulators require honest illustrations; an indexed annuity is regulated as insurance (state level) unless designed in a way that makes it a registered security.

Reading a Comparison the Way the Exam Does

Many items hand you a client profile and ask which product fits. Map the facts to risk tolerance and guarantees:

Two guardrails control most wrong answers. First, only fixed and fixed indexed annuities guarantee against loss of principal; a variable annuity can lose value unless a living-benefit rider is added. Second, only variable annuities are securities, so any reference to a prospectus, registered representative, or separate account points away from fixed and indexed products. A buyer who says "I cannot afford to lose any principal but want more than a CD" is describing a fixed indexed annuity, not a variable one.

Who bears investment risk in each family

The exam repeatedly asks where the investment risk sits:

• Fixed annuity: the insurer bears the risk and guarantees a minimum interest rate; funds sit in the insurer's general account. Regulated as insurance only.
• Variable annuity: the owner bears the risk; funds sit in separate-account subaccounts, and the contract is a security requiring a prospectus and a securities-licensed producer.
• Fixed indexed annuity: the insurer bears the downside (a 0% floor protects principal) while the owner gets limited upside tied to an index via caps, participation rates, and spreads. It is regulated as a fixed insurance product, not a security.

Why the licensing line matters

Because only the variable annuity is a security, only it requires FINRA registration in addition to the state life license. Misclassifying a fixed indexed annuity as a security, or selling a variable annuity without securities registration, is a tested compliance error.