Difficulty: Medium

Average Score: 70%

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 set payment amount over time, but this amount does not adjust for inflation. Consequently, as the cost of living increases, the real value of these fixed payments may decline, reducing the purchasing power of the annuitant’s income over the years.

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

This choice accurately highlights a significant disadvantage of fixed annuities. Since payments remain constant and do not adjust for inflation, the purchasing power of those payments diminishes over time, which can adversely affect the annuitant's financial stability.

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

This statement is incorrect regarding fixed annuities, as they typically provide a guaranteed amount that the annuitant will receive at regular intervals. The predictability of payment amounts is one of the primary benefits of fixed annuities, ensuring a steady income stream.

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

This option describes the nature of variable annuities rather than fixed annuities. In a fixed annuity, the insurer assumes the investment risk and provides a guaranteed return, which contrasts with the investment strategy of variable annuities that are subject to market fluctuations.

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

This statement does not accurately represent fixed annuities. Many fixed annuities provide options for death benefits or continuing payments to beneficiaries beyond a limited time frame, making this choice misleading in the context of fixed annuity contracts.

Conclusion

Fixed annuities offer predictable income, yet they come with the disadvantage of not adjusting for inflation, potentially eroding purchasing power over time. Other choices either misrepresent fixed annuities or pertain to features of variable annuities, underscoring that the inability to keep pace with inflation is a critical consideration for those relying on fixed payments for long-term financial planning.

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