All of the following are traits of a Fixed annuity, except:
A The insurer’s general account assets guarantee the fixed annuity contract
B The purchasing power of a fixed dollar benefit amount decreases as the cost of living increases
C The actual rate of interest credited will be based on the state-published interest rate index
D The insurer bears any investment risk
The correct answer and explanation is:
The correct answer is C: The actual rate of interest credited will be based on the state-published interest rate index.
Explanation:
A fixed annuity is a financial product that guarantees the annuitant a fixed return or payment for a certain period, typically for life, or a defined term. It offers stability and predictability, which is why it appeals to individuals seeking low-risk investment options. However, the traits of a fixed annuity are clearly defined by the following:
- A. The insurer’s general account assets guarantee the fixed annuity contract
In a fixed annuity, the insurer guarantees the annuity’s benefit payments based on its general account, which is composed of the insurer’s investments in bonds, mortgages, and other fixed-income securities. This guarantees the contract’s security and the payments, which is one of the main selling points of fixed annuities. - B. The purchasing power of a fixed dollar benefit amount decreases as the cost of living increases
Fixed annuities typically offer a fixed dollar amount in benefits, and this payment amount does not adjust for inflation. This means that over time, as the cost of living rises, the real value or purchasing power of those fixed payments will decline. - C. The actual rate of interest credited will be based on the state-published interest rate index
This statement is incorrect for a fixed annuity. The rate of interest credited on a fixed annuity is determined by the insurance company and typically fixed at the time the contract is purchased. Unlike variable annuities, the interest rate does not fluctuate with market or state-published interest rate indexes. Fixed annuities provide predictable, stable returns rather than market-based fluctuations. - D. The insurer bears any investment risk
This is one of the defining characteristics of fixed annuities. The insurer is responsible for the investment risk because it guarantees the annuity payments. Regardless of how well the insurer’s investments perform, the annuitant will receive the agreed-upon payments. Therefore, the risk is borne by the insurer rather than the annuitant.
In summary, the key difference in the incorrect statement (C) lies in the fact that fixed annuities have a guaranteed interest rate set by the insurer and are not tied to external indexes.