Colorado Life Producer License Practice Test

What do fixed annuities provide to policyholders?

1. Variable returns based on market performance

2. A minimum guaranteed rate of interest

3. Payments adjusted for inflation

4. Only lump-sum payments at retirement

The correct answer is: A minimum guaranteed rate of interest

Fixed annuities provide policyholders with a minimum guaranteed rate of interest, which means that the return on the investment is predetermined and does not fluctuate with market changes. This characteristic is particularly appealing to individuals seeking stability and predictability in their financial planning. The guarantee ensures that, regardless of economic conditions, the policyholder will earn at least the stated interest rate, which is usually set forth in the annuity contract. This assurance differentiates fixed annuities from other financial products, such as variable annuities, where returns are linked to the performance of underlying investments in the stock or bond markets. Unlike indexed annuities, which may offer some growth potential linked to market indices while providing certain guarantees, fixed annuities focus primarily on providing a reliable interest rate. Moreover, while some annuities may offer inflation protection or allow for different payment structures, fixed annuities are primarily known for their straightforward, consistent interest earnings without exposure to market volatility.