Connecticut Life Producer Practice exam

How does inflation impact the purchasing power of a fixed annuity?

1. It increases the purchasing power of income payments

2. It has no effect on purchasing power

3. It can erode the purchasing power of income payments

4. It guarantees a fixed purchasing power

The correct answer is: It can erode the purchasing power of income payments

Inflation has a significant effect on the purchasing power of a fixed annuity. A fixed annuity provides a predetermined income amount that remains constant over time. When inflation occurs, the general price levels in the economy rise, meaning that the same amount of money will buy fewer goods and services than before. Since the income payments from a fixed annuity do not adjust with inflation, their real value decreases over time. This erosion of purchasing power means that recipients may find that their fixed payments, while nominally unchanged, are insufficient to maintain their standard of living as prices increase. Therefore, the correct choice accurately captures this relationship between inflation and the inherent limitations of fixed annuity payments.