There are two classes of annuities – fixed and variable.
In a variable annuity, the insured assumes the risk of market fluctuations. In a fixed product, the insurance company assumes all such risk. No matter what happens in the financial markets, a fixed annuity holder suffers no loss of account value. An indexed annuity is classified as a fixed annuity which uses a distinct method of interest calculation as an external benchmark. It uses a formula that calculates changes in an identified market of investments such as stocks and corporate bonds. While never being actually invested in the market. For the protection of growth, the annuities in this class employ a floor and a ceiling of interest.
Under current federal law, annuities grow tax-deferred and may be subject to additional income tax if withdrawn prior to age 59½.
Fixed annuities are not a direct investment in the stock market. They are long term insurance products guaranteed by the issuing company not subject to the downturns of the market and can pass on the funds tax and probate free via a death benefit.