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A conventional Annuity has what major risk compared to a Variable Annuity?

Rationale

Inflation Risk.

Conventional annuities typically provide fixed payments over time, which can lose purchasing power due to inflation. In contrast, variable annuities often allow for investment in growth-oriented options that can potentially outpace inflation, making inflation risk a significant concern for conventional annuity holders.

A (You might die before you collect it all.) YOUR ANSWER

This statement reflects a general risk associated with all types of annuities, including both conventional and variable forms. While it is true that if a person dies before receiving the full benefits of an annuity, the remaining payments may not be collected, this factor does not specifically differentiate conventional annuities from variable annuities.

B (Your spouse might die before you do.) YOUR ANSWER

This choice addresses the personal risk related to the timing of death but does not highlight a distinct risk inherent to conventional annuities as compared to variable annuities. Both types of annuities can be affected by the death of a spouse, and such a risk is not exclusive to conventional annuities.

C (Inflation Risk.) CORRECT

Conventional annuities provide fixed payouts that do not adjust for inflation, so the purchasing power of those payments can erode over time. In contrast, variable annuities can offer growth potential through investment options that may help counteract inflation, making this risk particularly relevant when comparing the two types of annuities.

D (Investment Risk.) YOUR ANSWER

Investment risk pertains primarily to variable annuities, which involve fluctuations in market performance and potential losses. Conventional annuities, on the other hand, have a fixed return and do not expose the holder to the same investment risks as variable options. Thus, this choice does not capture the primary risk of conventional annuities compared to variable ones.

Conclusion

The major risk associated with conventional annuities, in contrast to variable annuities, is inflation risk, as their fixed payments may diminish in value over time due to rising prices. This can significantly impact the financial security of the annuity holder throughout retirement. Other options presented focus on mortality risks or investment risks, which do not uniquely apply to conventional annuities.

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