PSI Life Exam Practice Test

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What is a potential disadvantage of a fixed annuity?

Higher initial costs
Decreased purchasing power due to inflation
No early withdrawal options
Limited investment choices

The correct answer is: Decreased purchasing power due to inflation

A potential disadvantage of a fixed annuity is that it can lead to decreased purchasing power due to inflation. Fixed annuities provide a guaranteed return over time, often in the form of consistent payments. However, if inflation rises during the period of the annuity, the purchasing power of those fixed payments may diminish. This means that while the amount of income remains the same, what that income can buy may decrease, making it less valuable over time. This aspect underscores the importance of considering inflation when planning for long-term financial commitments, as it can significantly affect the real value of the money received from a fixed annuity. While fixed annuities offer stability and guaranteed returns, individuals must balance that stability with the potential erosion of value from inflation.