Difficulty: Medium

Average Score: 72%

People commonly purchase an annuity to protect against the risk of

Rationale

People commonly purchase an annuity to protect against the risk of outliving their financial resources.

Annuities are financial products designed to provide a steady income stream, particularly during retirement, addressing the concern of individuals outliving their savings. This risk is particularly pertinent as life expectancy increases, making annuities a popular choice for financial security.

A (dying too soon.) YOUR ANSWER

While some may consider life insurance for protection against dying too soon, annuities are specifically structured to provide income over time rather than a death benefit. Annuities do not directly address the financial implications of premature death, focusing instead on ensuring income during one's lifetime.

B (becoming uninsurable.) YOUR ANSWER

The concept of becoming uninsurable relates to health issues that prevent one from obtaining insurance coverage. Annuities do not mitigate this risk; rather, they serve as a financial tool for income generation in later years. This choice does not align with the primary purpose of annuities.

C (outliving their financial resources.) CORRECT

Individuals purchase annuities primarily to safeguard against the possibility of depleting their savings during retirement. An annuity guarantees a fixed income for a specified period or for the remainder of the individual's life, effectively addressing the concern of longevity and financial security.

D (dying before their home mortgage is paid off.) YOUR ANSWER

This option pertains to concerns about leaving debts unpaid upon death, which is typically managed through life insurance rather than annuities. Annuities are not intended to cover liabilities such as a mortgage but focus on providing income during retirement.

Conclusion

Annuities serve as a crucial financial strategy for individuals seeking to ensure they have adequate income to live comfortably in retirement, particularly addressing the risk of outliving their resources. While other options relate to different aspects of financial planning, they do not encapsulate the primary purpose of annuities, which is to provide lasting financial support throughout one's lifetime.

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