California Life-Only & Accident and Health AgentLife InsuranceMedium
A 68-year-old retired individual has a substantial sum of money they wish to invest to provide a guaranteed income stream for life, but they are concerned about inflation eroding the purchasing power of their payments over time. Which type of annuity would best address their primary concern?
- AFixed Deferred Annuity
- BEquity-Indexed Annuity
- CVariable Immediate Annuity
- DFixed Immediate Annuity
Show answer & explanationAnswer & explanation
Correct answer: C. Variable Immediate Annuity
A Variable Immediate Annuity provides immediate income payments that can fluctuate based on the performance of the underlying investment subaccounts. This offers potential for growth that can help offset inflation, addressing the client's concern about purchasing power erosion.
Why the other options are wrong
- A. A Fixed Deferred Annuity defers income payments to a future date and typically does not offer inflation protection once payments begin.
- B. An Equity-Indexed Annuity offers a minimum guaranteed return with potential upside linked to an index, but it's typically a deferred annuity and its inflation protection is limited and often capped.
- D. A Fixed Immediate Annuity provides guaranteed, level payments, but these payments do not adjust for inflation.
Variable Immediate Annuity
An annuity that begins paying income immediately, where the payment amounts can fluctuate based on the investment performance of underlying subaccounts selected by the annuitant, offering potential for inflation protection.
- Payments start immediately.
- Payment amounts vary based on investment performance.
- Offers potential for growth, acting as an inflation hedge.
- Annuitant bears investment risk.
Memory trick: Variable annuities vary with the market, like a chameleon changing colors.