New Jersey Life Producer Practice Exam

What risk does an annuity cover?

1. Increasing term insurance

2. Decreasing term insurance

3. Permanent life insurance

4. Endowment insurance

The correct answer is: Decreasing term insurance

An annuity primarily addresses the risk of outliving one’s savings or financial resources. It is designed to provide a steady income stream for a specific period or for the lifetime of the annuitant. This financial product is particularly beneficial for individuals planning for retirement, as it helps ensure that they have sufficient funds to cover their living expenses over time, thus mitigating the risk of running out of money. In contrast, decreasing term insurance is a type of life insurance that provides a death benefit that decreases over the life of the policy. This type of insurance is often used to cover specific financial obligations, such as a mortgage, where the debt decreases over time. While it does provide financial protection, it does not serve the same purpose of guaranteeing income for life, which is the main feature that annuities offer. By ensuring that there is a consistent income flow, annuities effectively cover the longevity risk, making them a crucial component for retirement planning.