Fixed index annuities are booming, with Q4 2024 sales up 22% year-over-year, driven by high interest rates. Experts say these products offer better returns, income guarantees and downside protection in today’s market. In a high-rate environment, fixed index annuities are a solid option.
Fixed index annuities (FIAs) continue to be a hot commodity, establishing record sales with $30.4 billion in the fourth quarter of 2024 – that’s up 22% from the same quarter the year before. Total FIA sales were $125.5 billion, up 31% from 2023.
FIAs have thrived in a sustained high-interest rate environment, but through the first quarter of 2025, the US inflation rate, as measured by the Consumer Price Index, fell from 2.8% in February to 2.4% in March, the lowest rate since September, 2024.
FIAs are intrinsically tied to interest rates, and reward investors in periods of high rates, but even lower interest rates won’t discourage consumers looking for stable income.
“If interest rates continue to drop this year as expected, it will undoubtedly diminish demand for FRDs in 2025,” said Bryan Hodgens, senior vice president and head of LIMRA research. “Yet with a significant amount in FRD contracts coming out of surrender over the next couple of years, LIMRA believes many conservative investors will reinvest their assets in these products.”
“Now, in terms of the current market, fixed index annuities are more attractive than they’ve been in years.” That has a lot to do with interest rates,” said Ramzy Ladah, an attorney at Ladah Law Firm in Las Vegas, Nevada. “While the annuity’s return is based on a market index, the insurer uses its own investments—mostly bonds and similar instruments—to generate the income that supports the guarantees.”
When interest rates go up, insurers make more on those investments, and that allows them to offer more generous terms to clients. “We’ve seen better cap rates, more flexible crediting options and higher guaranteed minimums lately,” Ladah noted. “That’s not random. It’s directly tied to the economic climate.”
Overwhelmed by Safe Retirement Options?
Three Things Consumers Need To Know About Annuities and Interest Rates
People who may be interested in purchasing an annuity need to do their homework on what interest rates bring to the table before signing on the dotted line. Start with these factors.
High Rates and Extra Yields
With interest rates still relatively high, even with the March CPI decline, FIAs are in high demand, and that trend should continue, experts say, as industry providers offer consumers better annuity deals.
“In high-interest rate environments, insurance companies are able to earn more from their general account investments (usually high-grade bonds),” said Pamela Ferguson, a tax advisor and insurance agent at Pajako in Forney, Texas. “This extra yield allows them to offer three benefits to annuity buyers.”
- More generous participation rates (i.e., you get a larger share of the market upside)
- Better cap rates and more income rider value
- Sometimes even higher guaranteed payouts
“In short, when rates rise, annuity companies get stronger — and they pass some of that strength to the consumer,” Ferguson adds.
Timing It Right
When interest rates are low, fixed index annuity caps are often less appealing, and income riders cost more for less benefit.
“When interest rates are high (like now), FIAs become far more competitive — sometimes outperforming conservative stock funds without the market risk,” Ferguson noted.
Yet timing matters, too.
“Buy during a low-rate period and you may be locking in lower benefits. Buy during a high-rate period (like today), and you could be capturing the golden age of FIA value,” she added.
Higher Rates and Downside Protection
Similar to registered index linked annuities (RILAs), fixed index annuities usually have an investment floor that helps individuals build retirement savings while managing their risk tolerance.
“That’s important, as retirement investors tend to place equal value on protecting savings and maximizing gains, and index annuities – whether fixed or RILAs – give individuals the ability to stay invested in equity markets with some level of downside protection,” said Sri Reddy, SVP of retirement and income solutions at Principal Financial Group in Des Moines, Iowa. “For the vast majority of people, that’s what makes annuities an attractive option because the alternative to protect and preserve their retirement nest eggs would otherwise be putting money in cash accounts or bank CDs.”
Interest rates are meaningful for annuities because they influence the rate of return insurance companies can guarantee.
“In higher rate environments like we’ve been experiencing the past few years, insurance companies are more capable of replicating market returns on the annuities they offer,” Reddy added.
Managing Risk With FIAs
During volatile and uncertain times, an individual’s preference towards stocks, bonds and annuities largely depends upon their risk tolerance, investment time horizon and personal financial situation. That goes for periods of high and low interest rates.
“To more confidently manage your investment mix, have a plan to rebalance your assets at least once per year,” Reddy noted. “During that evaluation, you should think about your risk profile and what adjustments may be needed.”
For example, once you’ve reached age 59 ½, annuities perform similarly to other types of investments. “Yet they give you more power and control over your tax deferral strategies, which can be especially useful if you have non-qualified assets,” he added.
Even so, buyers need to remember that the relationship between annuities and interest rates works both ways.
“If you lock into a long-term contract now and rates drop a few years from now, you might be in a great position,” Ladah said. “But if you delay and buy into an annuity when rates are lower again, the benefits might shrink.”
That’s why timing and understanding the long view matter.
“The legal documents you receive will outline the details, but they’re not always easy to interpret without help,” Ladah added. “It’s okay to ask someone to walk you through the worst-case scenario, not just the best one.”
Editor Norah Layne contributed to this article.
