New Jersey Life and Health State Practice Exam

When comparing fixed and variable annuities, which is true about fixed annuities?

1. They have higher potential returns

2. They provide guaranteed minimum income

3. They are affected by market conditions

4. They require more management than variable annuities

The correct answer is: They provide guaranteed minimum income

Fixed annuities are designed to provide a level of security and predictability for the investor. The primary characteristic of fixed annuities is that they offer a guaranteed minimum income, which means that the annuitant can expect a specific amount of money to be received, regardless of market fluctuations. This guarantees a steady income stream, making fixed annuities an attractive option for individuals seeking stability, especially during retirement. The distinction between fixed and variable annuities lies in how their returns are structured. Fixed annuities do not expose the owner to the volatility of the stock market, unlike variable annuities which can offer higher potential returns based on the performance of underlying investment options. However, this comes with greater risks as the returns on variable annuities can fluctuate widely. Therefore, the predefined and reliable income stream provided by fixed annuities is a significant advantage for those looking for less risky investment options. In contrast, the idea that fixed annuities would yield higher potential returns is not true; they typically have lower returns than variable annuities which can take advantage of market growth. Additionally, fixed annuities are not directly affected by market conditions like variable annuities are, and they require significantly less management because they do not