Floor
A floor is the minimum interest credit on an indexed annuity in a given crediting period. For nearly all fixed indexed annuities, the floor is 0%, meaning that even if the underlying index has a large negative return during the crediting period, the contract value does not decline due to index performance. The floor is what distinguishes an indexed annuity from a direct equity investment: principal cannot decline due to market movements (it can decline due to surrender charges, withdrawals, or rider charges, but not due to index performance).
A 60-year-old owns a $200,000 FIA with a 7% cap and a 0% floor. In year one, the S&P 500 declines 25%. The contract value remains $200,000 — no loss credited despite the market decline. In year two, the S&P 500 returns 30%. The contract credits 7% (capped), bringing the value to $214,000. By contrast, a direct S&P 500 investment of $200,000 would have declined to $150,000 in year one and recovered to $195,000 in year two — still below the starting value despite the second-year recovery.
Why it matters
The 0% floor is the central feature of fixed indexed annuities. It is the reason consumers buy them. In market environments with sustained negative or volatile returns, the floor produces dramatically better outcomes than a direct index investment. In sustained bull markets, the floor produces worse outcomes because the cap or participation rate limits the captured upside.
How to evaluate
Confirm the floor is 0% (or better; some products offer a 1% or 2% minimum credit). A few products offer "buffer" strategies (e.g., minus-10% buffer means the consumer absorbs the first 10% of any index decline) instead of a true 0% floor. Buffer strategies behave differently from floored strategies in market crashes and are not equivalent.
In the contract
Look for "minimum index credit," "floor," or "minimum guaranteed annual credit." Buffer strategies are usually labeled "buffer" or "structured" rather than "indexed."
Related terms
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