In what way does an indexed annuity differ from a fixed annuity?

An indexed annuity stands apart from a fixed annuity primarily because it links its interest crediting to the performance of a specific stock market index, such as the S&P 500. This connection allows indexed annuity holders to potentially earn a higher return than the guaranteed minimum offered by fixed annuities, which typically provide a predetermined interest rate.

The innovative feature of indexed annuities is that their interest returns can increase as the linked index performs well, subject to caps and participation rates. As a result, indexed annuity owners may receive credited interest that reflects the fluctuations of the linked index, thus introducing a layer of growth potential that fixed annuities do not possess.

In contrast, fixed annuities offer stable returns but lack any connection to market performance, providing predictability without the opportunity for higher gains based on market trends. This focus on market linkage is what makes indexed annuities unique and appealing, particularly to those looking for growth potential while still having some degree of protection against market losses.