California Life and Health Insurance Practice Exam

What is a common reason individuals purchase an annuity?

1. To gain immediate access to funds

2. To protect against the risk of outliving their financial resources

3. To reduce tax liability

4. To increase their investment returns

The correct answer is: To protect against the risk of outliving their financial resources

Individuals often purchase an annuity primarily as a strategy to protect against the risk of outliving their financial resources, which is a significant concern, especially for retirees. Annuities are designed to provide a steady stream of income over a specified period or for the lifetime of the annuitant. This feature makes them particularly appealing as individuals face the uncertainties of retirement, such as rising healthcare costs or unexpected expenses, and want to ensure they have a reliable source of income throughout their retirement years. The structure of annuities allows for a variety of payout options, including immediate annuities that begin payments right away and deferred annuities that accumulate interest over time before payouts begin. This flexibility enables individuals to tailor their annuity to their specific financial needs, contributing to financial security in later years. While other options might offer benefits, they do not address the primary concern of longevity risk as directly as annuities do. For instance, gaining immediate access to funds focuses on liquidity, which is not a characteristic of annuities. Similarly, while there can be tax advantages associated with annuities, this is generally not the primary reason for purchasing one. Investing for higher returns may be a motive, but it contrasts with the primary security and income