What Is a Fixed-Index Annuity?


Quick Answer

Fixed-index annuities are an investment product consumers may purchase in order to receive a guaranteed minimum income from the investment after a certain period of time, as Annuity FYI reports. These investments are popular with retirees and are indexed to a stock market index allowing growth potential and increasing payouts.

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These annuities provide either a minimum payout or payments based on the return offered by a stock market index and allow consumers to choose a term and payment date, as Annuity FYI reports. A minimum interest rate is guaranteed, with additional returns credited to the account after fees and fund charges are paid. Cap rates apply to some annuities and restrict the amount of interest to a maximum percentage. Stock dividends are excluded from consideration as part of the stock index's returns.

Annuities have distinct differences from other investments and investors should be aware of the potential disadvantages of fixed-index annuities, as CBS News explains. Fixed-index annuities defer taxes to whenever payments are received and may result in higher taxation later if the taxpayer is pushed into a higher marginal tax rate. Part of the income received from the investment is actually just the return of the original principal amount. Other clauses in the annuity contract can impact the return, such as a cap on earnings, participation rate and any bonus clauses. Finally, commissions and early-withdrawal fees may apply if money is removed early and may increase the total costs of the account.

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