Multiple Choice
Under a pure life annuity, an income is payable by the company:
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In a fixed annuity, who bears all of the investment risk?
A
The annuity's beneficiaries
B
The annuity holder (investor)
C
The federal government
D
The insurance company
Verified step by step guidance1
Understand the concept of a fixed annuity: A fixed annuity is a financial product offered by insurance companies that provides guaranteed payments to the annuity holder over a specified period or for their lifetime.
Identify the investment risk in a fixed annuity: In a fixed annuity, the insurance company guarantees a fixed rate of return and assumes the responsibility for managing the underlying investments.
Clarify who bears the investment risk: Since the insurance company guarantees the fixed payments regardless of the performance of the investments, the insurance company bears all the investment risk.
Explain why other options are incorrect: The annuity holder does not bear the investment risk because their payments are fixed and guaranteed. The federal government is not involved in bearing the investment risk for private annuities. Beneficiaries only receive payments after the annuity holder's death and do not bear investment risk.
Conclude with the correct answer: The insurance company bears all the investment risk in a fixed annuity.
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