Colorado Life Producer License Practice Test

In a fixed annuity, who bears all of the investment risk?

1. The annuity holder

2. The investment firm

3. The insurance company

4. The government

The correct answer is: The insurance company

In a fixed annuity, the insurance company bears all of the investment risk. This means that the insurer is responsible for managing the investments that back the annuity and ensuring that it can meet its promised payout to the annuity holder. The guaranteed returns provided by a fixed annuity are based on conservative investments that the insurance company chooses, and they take on the risk of any investment fluctuations. The annuity holder receives a set interest rate and has no exposure to market volatility; changes in the market do not affect the guaranteed returns they will receive. This structure allows individuals to have a stable source of retirement income without worrying about investment losses. Meanwhile, other entities like the investment firm or the government do not assume responsibility for the investment outcomes of fixed annuities, further clarifying that the insurance company is the entity taking on all related risks.