Life & Health Insurance Exam (National Portion)Life InsuranceHard
A 60-year-old individual wants to purchase an annuity that will provide a guaranteed income stream for the rest of their life, starting in 5 years. They are concerned about inflation eroding the purchasing power of their future payments. Which of the following annuities would best meet their needs?
- AEquity-Indexed Deferred Annuity
- BVariable Deferred Annuity
- CFixed Deferred Annuity
- DSingle Premium Immediate Annuity (SPIA)
Show answer & explanationAnswer & explanation
Correct answer: A. Equity-Indexed Deferred Annuity
The client needs a deferred annuity (income starts in 5 years) that offers protection against inflation. A Variable Deferred Annuity offers growth potential but also market risk. An Equity-Indexed Deferred Annuity offers growth linked to a market index with principal protection, making it a good choice for inflation concern without direct market risk.
Why the other options are wrong
- B. Variable Deferred Annuities offer growth potential but also carry market risk, which the client might be trying to avoid if concerned about 'eroding purchasing power' and seeking a 'guaranteed income stream'.
- C. Fixed Deferred Annuities offer guaranteed, predictable payments but do not offer protection against inflation, which is a stated concern.
- D. SPIA payments start immediately, not in 5 years, and typically offer fixed payments with no inflation protection.
Equity-Indexed Annuity (EIA)
A type of deferred annuity that offers a minimum guaranteed interest rate combined with an interest rate linked to a market index, providing potential for growth without direct market risk.
- Combines features of fixed and variable annuities.
- Interest credited based on performance of a stock market index (e.g., S&P 500).
- Includes a guaranteed minimum interest rate or principal protection.
- Suitable for those seeking growth potential with risk mitigation.
Memory trick: Equity-Indexed: GROWTH from stocks, SAFETY from fixed.