Income Intermediate: Annuity Risks

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1.
Investment risk is the risk that your underlying assets will default, depreciate, or lose purchasing power over time.
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True. Investment risk is the risk that your underlying assets will default, depreciate, or lose purchasing power over time.
2.
If you outlive your actuarial life expectancy, the insurance company profits.
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False. The insurance company bases its payments to you on your statistical life expectancy. So, if you outlive your life expectancy, the company loses money by having to continue paying you.
3.
Annuities generally carry _______.
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Both surrender charges and early withdrawal penalties. In exchange for no front-end costs and certain tax-favored advantages, annuities carry company-imposed surrender charges in the early years of ownership, and considerable IRS penalties for early withdrawal of funds prior to age 59½.
4.
In a fixed annuity, it is the _______ who bears the investment risk.
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Insurance company. The insurance company guarantees the fixed annuitant's principal and a minimum rate of return. As such, it is the insurance company that bears the investment risk of a fixed annuity.
5.
The value of an indexed annuity will decrease proportionately with the index to which it is tied.
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False. If the index has a loss for the year, the annuity will not decrease in value. Instead, it will either remain at the exact dollar amount at which it began the year, or it will be credited some nominal interest rate.