New York Child Abuse Identification and Reporting Practice Exam

What is a disadvantage of a flexible premium annuity?

1. The benefits are guaranteed

2. The actual amount of the annuity benefit cannot be determined in advance

3. The requirements for withdrawals are stringent

4. The premiums are fixed

The correct answer is: The actual amount of the annuity benefit cannot be determined in advance

The selection of the option regarding the inability to determine the actual amount of the annuity benefit in advance highlights a key characteristic of flexible premium annuities. In these types of annuities, the investor has the flexibility to choose the amount and frequency of their premium payments. This variability can lead to uncertainty regarding the overall growth of the annuity and the ultimate benefit it will provide at retirement or maturity. Since contributions can fluctuate, factors such as the performance of the underlying investments, fees, and timing of withdrawals can all significantly impact the final accumulation of the annuity benefits. Therefore, a prospective annuitant may face challenges in anticipating the exact amount they will receive in the future, as it is contingent on many variables that are not fixed. This lack of predictability makes planning for long-term financial needs more complex, setting it apart from more traditional fixed premium annuities where the benefits are typically easier to estimate.