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Which of the following is a potential DISADVANTAGE of a fixed annuity?

Rationale

Annuitants could experience a decrease in the purchasing power of their payments over a period of years due to inflation.

Fixed annuities provide a predetermined payment amount, but this fixed sum can lose its value over time due to inflation, which diminishes the purchasing power of those payments. This disadvantage means that the real value of the money received may decrease as the cost of living rises.

A (Payments continue only for a maximum of 2 years after the annuitant's death.) YOUR ANSWER

This statement is misleading, as the terms of fixed annuities can vary widely. While some contracts may have specific payout rules post-death, many fixed annuities do not limit payments to just two years after the annuitant's death. This is not a universal disadvantage and therefore does not apply to all fixed annuities.

B (The insured invests payments in variable securities, and the return fluctuates with an uncertain economic market.) YOUR ANSWER

This option describes a characteristic of variable annuities, not fixed annuities. In fixed annuities, the returns are stable and predetermined, providing protection from market fluctuations. Therefore, this statement does not represent a disadvantage of fixed annuities.

C (There is no guaranteed specific benefit amount to the annuitant.) YOUR ANSWER

Fixed annuities actually provide a guaranteed benefit amount, which is one of their primary advantages. The payments are predetermined and fixed, offering security and predictability to the annuitant. Thus, this statement is inaccurate regarding fixed annuities.

Conclusion

Fixed annuities offer benefits such as guaranteed payments; however, a significant disadvantage is their vulnerability to inflation, which can erode the real value of the fixed payments over time. Understanding this drawback is crucial for individuals considering fixed annuities, particularly in a fluctuating economic environment where inflation can impact long-term purchasing power.

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