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What Is an Annual Reset of a Fixed Index Annuity?


A fixed index annuity (FIA) or equity indexed annuity is an insurance contract that combines principal protection with potential market-linked returns. If the chosen market index that’s linked to the annuity performs well over the course of the year, the annuity holder enjoys a portion of those gains as interest. An annual reset is the mechanism by which those gains are “locked” into the accumulated value of the annuity, ensuring the interest is protected from potential market downturns in the future. A financial advisor can help you determine whether an FIA or other annuity is appropriate for your retirement plan. 

What Is an Annual Reset?

At its core, an annual reset aims to provide investors with the opportunity to benefit from market growth while safeguarding their principal against market downturns. An FIA’s performance is typically tied to a chosen market index, such as the S&P 500. However, unlike direct investment in the stock market, the annuity doesn’t involve purchasing stocks. Instead, it offers the potential for interest credits that are based on the index’s performance.

Each year, on the anniversary of the annuity contract, the insurance company examines the index’s value. The annuity’s credited interest is determined by measuring the index’s performance from the beginning of the contract year to its end. 

If the index shows growth, a portion of that growth – subject to certain limitations known as “caps” or “participation rates” – is added to the annuity’s value. Importantly, even if the index experiences a decline during the year, the annuity’s principal remains protected from those losses. 

How an Annual Reset in a Fixed Index Annuity Works

The S&P 500 is a common market index for fixed index annuities.

At the end of the tracking period, the annuity’s value is reset based on the positive performance of the chosen index. This means that the gains achieved during the year are locked in and the new value becomes the starting point for the next tracking period.

Over time, the annuity’s value has the potential to compound as gains from previous years are added to the accumulated value. This compounding effect can lead to significant growth in the annuity’s value, especially during periods of consistent market growth.

But even if the market index experiences losses in subsequent years, the annuity’s value remains unaffected by these downturns. The process of annual resetting and compounding repeats each year, allowing your annuity to capture market gains while staying shielded from losses. This cycle continues until you decide to start receiving income from the annuity.

Example of an Annual Reset

A financial advisor talks with a couple about the annual reset of their fixed index annuity.

An investor owns a fixed index annuity with an annual reset and a current value of $10,000. The specified market index posted a 7% return at the contract year’s end. As a result, the annuity’s value would increase by 7% to $10,700.

However, if the annuity contract includes a participation rate, only a portion of the 7% gain would be credited to the accumulation value. If the annuity in the example above had a 90% participation rate, the accumulated value would increase by 6.3%.

Pros and Cons of an Annual Reset

The annual reset feature brings both advantages and potential drawbacks to investors. 


  • Market upside participation: The annual reset allows policyholders to benefit from market upswings, as gains are locked in periodically. This potential for growth can help counter the effects of inflation.
  • Principal protection: Even in a downturn, the annuity’s value is shielded, as the annual reset prevents losses from being carried forward. This protection provides peace of mind for risk-averse investors.


  • Capped returns: Some FIAs impose a cap on potential returns to mitigate risk for the insurer. As a result, policyholders might not fully capitalize on market gains.
  • Limited liquidity: Annuities often have longer surrender periods, and accessing funds before the term can lead to penalties. This lack of liquidity might not suit those requiring immediate access to their money.
  • Complexity: The calculations involved in annual resets can be intricate, making it crucial for policyholders to fully comprehend how their annuity functions.

Bottom Line

The annual reset feature of a fixed index annuity provides an intriguing balance between market-linked growth and principal security. While it offers the potential for higher returns, it’s important for individuals to consider their risk tolerance, financial goals and the annuity’s terms before making a decision.

Annuity Tips

  • A financial advisor can help you decide whether this product is right for you and guide you through the process of purchasing one. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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