South Carolina Life Insurance Practice Exam

What is a disadvantage of fixed annuities in times of inflation?

1. The benefits increase with inflation

2. The benefits can lose purchasing power

3. The risks of investment are higher

4. The payout period is limited

The correct answer is: The benefits can lose purchasing power

Fixed annuities provide a guaranteed payout amount that does not change over time. This means that the payments made to the annuitant are set at the time of purchase and remain constant throughout the annuity’s lifetime. In an inflationary environment, the purchasing power of money decreases; therefore, the fixed payments may not keep pace with rising prices. As inflation increases, the real value of the benefits received from a fixed annuity diminishes, leading to a situation where the annuitant can buy less with the same amount of money over time. This loss of purchasing power is a significant disadvantage of fixed annuities when inflation affects the economy. Other options do not accurately capture the primary disadvantage associated with fixed annuities in inflationary contexts. Benefits that increase with inflation, for instance, would indicate a different product that includes inflation protection. The risks of investment being higher does not apply to fixed annuities, as they offer guaranteed returns with no market risk. Lastly, while the payout period may vary, it is not inherently limited in a way that ties directly to economic conditions like inflation. Thus, the crux of the issue remains the fixed nature of the annuity payments and their inability to adjust for inflation, eroding the value of