section 1 - The American College Online Learning Center

a. Helps to potentially minimize:(1) Longevity risk—An ALDA is designed to provide the most cost-effectiveinsurance against longevity risk.(2) Excess withdrawal risk—Using assets to purchase ALDA means that thoseassets won’t be prematurely spent.(3) Inflation risk—An ALDA can be used as inflation hedge. It provides extrafunds later in retirement to make up for lost purchasing power.(4) Investment risk—The use of an ALDA shifts the investment risk for thefunds used to purchase the annuity from the client to the insurer.(5) Loss-of-spouse risk—Using an ALDA based on the life of the survivingspouse will help to provide income to the widowed spouse.b. Hurts by potentially exacerbating:(1) Liquidity risk—The use of an ALDA means assets are consumed to pay forthe annuity. Consuming those assets might impede the client from havingthe funds needed for major expenses in retirement.(2) Loss-of-spouse risk—Creating an ALDA based on the life of the spousewho dies first will take away assets from the widowed spouse.(3) Bequest opportunity—an annuity takes away the client’s ability to leavethose assets to his or her heirs.4. Purchase a deferred variable annuity that also promises a guaranteed living benefitpayment. This strategy:a. Helps to potentially minimize:(1) Longevity risk—The use of deferred variable annuity that also promises aguaranteed living benefit payment mitigates longevity risk because annualincome is guaranteed no matter how long the client lives.(2) Inflation risk—The use of deferred variable annuity that also promises aguaranteed living benefit payment mitigates inflation risk. If a guaranteedminimum accumulation rider is used, this rider guarantees a minimalincrease in each period to keep up with inflation. Also the underlying equityinvestments may help to keep pace with inflation.(3) Liquidity risk—The use of deferred variable annuity that also promises aguaranteed living benefit payment mitigates liquidity risk because the clienthas access to his or her money.(4) Point-in-time risk–inflation risk—The use of deferred variable annuity thatalso promises a guaranteed living benefit payment mitigates point-in-timerisk since some of the underlying investments are in equities.(5) Frailty risk–inflation risk—The use of deferred variable annuity that alsopromises a guaranteed living benefit payment mitigates frailty risk becausethe annual payments can be set up before the client suffers from confusionand then left on auto-pilot.(6) Loss-of-spouse risk—The use of deferred variable annuity that alsopromises a guaranteed living benefit payment mitigates spousal survivalrisk because death benefits are available from these products.b. Hurts by potentially exacerbating:5.35