An annuity is a long-term investment between you, the annuitant, and an insurance company, the annuity issuer. Under this contract, you pay after-tax funds to the annuity issuer, who then invests your principal to meet your financial objectives and pays you or your beneficiary back with earnings (subject to the claims-paying ability of the issuer).
There are two types of fixed annuities: traditional fixed and indexed annuities. Fixed annuities are regulated by state insurance departments and sold through insurance agents. How the actual rate of interest is credited on the policy differentiates traditional fixed annuities from indexed annuities. Traditional fixed annuities pay interest on the premium contributed at a rate declared by the insurer in advance.
Indexed annuities are a type of fixed annuity which are regulated and distributed in the same manner as fixed annuities (through licensed insurance agents). Indexed annuities are a conservative safe money place for retirement dollars. A buyer does have an option to elect a declared interest rate with an indexed annuity as well, and functions the same as a traditional fixed annuity. However, the annuity is designed for higher potential interest rates, and provides other allocation options which consider the performance of an outside stock index (such as the S&P 500) to determine the rate of interest. Indexed annuities have a floor of zero, meaning the absolute worst-case scenario due to a downturn in the market index is a consumer might receive no interest in a particular year, however, he or she cannot lose any previously credited interest or premiums.