What happens to the purchasing power of benefit payments from a fixed life annuity when the cost of living rises?

When examining a fixed life annuity, it’s important to understand how the payments function in relation to inflation. A fixed life annuity guarantees a specific amount paid regularly to the annuitant over their lifetime, which does not change regardless of economic conditions.

As the cost of living rises due to inflation, the real value of the fixed payment declines. This means that even though the nominal amount you receive remains the same, its purchasing power diminishes because you can buy less with that same amount as prices increase. Thus, over time, fixed life annuity payments can effectively lose value in terms of what they can actually purchase, hence the purchasing power of these benefit payments decreases when inflation occurs.

In contrast, options that suggest an increase, stability, or fluctuation with the market do not accurately reflect the characteristics of fixed life annuities in the context of rising living costs, as such annuities are designed to provide the same, unchanging payment throughout the duration of the contract.