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What are some tips for buying index annuities?

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Quick Answer

Tips for buying fixed income annuities relate to understanding the cap, participation rate, spread or asset fee, bonus and riders, notes Fidelity Investments. The idea of a fixed income annuity is to invest an amount of money in return for protection against volatile or unstable markets.

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Full Answer

The cap on an index annuity relates to the upper limit on a return over a certain time period, explains CBS News. A cap specifies the highest rate of return that an investor is eligible to receive. Certain insurance companies have the right to lower the cap in certain economic conditions. Some index annuities also strip out dividend payments when factoring in cap totals.

The participation rate refers to the percentage of the index's return the insurance company credits to the annuity, reports Fidelity Investments. Spread or asset fees relate to a subtraction from the gain of the indexed annuity. Bonuses relate to percentages of the first-year premiums included with a contract value.

Certain bonuses and earnings are subject to vesting schedules. These vesting schedules can dictate the eligibility to receive a bonus in later periods. Taxes on interest credited in fixed annuities are deferred, but this condition does not necessarily lead to lower tax rates. Income brackets and other factors impact the tax rate associated with an indexed annuity, notes CBS News.

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