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Discuss why it makes sense to consider annuities as part of your risk prevention strategy. What...

Discuss why it makes sense to consider annuities as part of your risk prevention strategy. What do you see as some of the advantages and disadvantages?

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Answer #1

Annuities are a part of risk prevention strategy for the following advantages:

1. They have regular payments and ensure a fixed minimum payment each period unlike stocks which have volatile returns.

2. Annuities are adjusted for time value of money and have inflation factor imbedded in the payment.

3. The premiums are set according to the individual requirements.

Disadvantages:

1. Reduced liquidity since the money deposited for an annuity cannot be easily broken.

2. The actual benefit from the annuity starts off after a long wait period.

3. Annuity income is under the normal tax bracket and hence you may end up paying more tax when compared to stocks.

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