Question 12

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

One of the potential disadvantages of a fixed annuity is that over time, inflation can erode the purchasing power of the fixed payments received by the annuitant. This means that while the dollar amount of the payments remains the same, their value in terms of what they can actually buy may decrease significantly.

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

This statement is incorrect as a general disadvantage of fixed annuities. While some fixed annuities may have specific terms regarding death benefits, many options include features that allow payments to continue to beneficiaries or that provide other forms of death benefits beyond just two years.

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

This option describes characteristics of variable annuities rather than fixed annuities. Fixed annuities provide guaranteed returns based on a predetermined interest rate and do not involve investment in variable securities, thus making this statement irrelevant to the disadvantages of fixed annuities.

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

This statement is misleading in the context of fixed annuities. Fixed annuities typically offer a guaranteed benefit amount based on the terms of the contract, which provides a stable income stream. Therefore, this is not a valid disadvantage of fixed annuities.

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

This option accurately reflects a significant disadvantage of fixed annuities. Since the payments are fixed and do not adjust for inflation, the value of the payments can diminish over time, impacting the annuitant's financial stability and purchasing power.

Conclusion

In summary, the correct answer highlights a critical disadvantage of fixed annuities related to inflation's impact on purchasing power. The other options either misrepresent the characteristics of fixed annuities or are not applicable disadvantages, confirming that D is the most accurate response. Understanding these nuances is essential for evaluating annuity products effectively.