What annuity settlement option produces the largest monthly income guaranteed for life?

What annuity settlement option produces the largest monthly income guaranteed for life?

• A. Pure life settlement option
• B. Second life contingency option
• C. Life with period certain (ie. 10 years)
• D. Third life contingency option

Answer: (A)

The main idea is that how long payments are guaranteed affects the size of each monthly check. The more guarantees built into an option, the smaller the monthly amount has to be to cover the extra risk. The pure life option pays the beneficiary as long as the annuitant is alive and ends at death with no additional guarantees. Since there’s no obligation to continue payments beyond the annuitant’s life, the insurer can offer a higher monthly payout. Options that add guarantees—whether payments continue for a period after death (period certain), or continue if other lives remain alive (second life, third life contingencies)—reduce the monthly amount. These guarantees increase the insurer’s liability, so the payment is lowered to account for the longer expected payout, or the survival of other lives. So the largest monthly income is from the pure life settlement option, because it has the fewest guaranteed extensions beyond the annuitant’s life.

The main idea is that how long payments are guaranteed affects the size of each monthly check. The more guarantees built into an option, the smaller the monthly amount has to be to cover the extra risk.

The pure life option pays the beneficiary as long as the annuitant is alive and ends at death with no additional guarantees. Since there’s no obligation to continue payments beyond the annuitant’s life, the insurer can offer a higher monthly payout.

Options that add guarantees—whether payments continue for a period after death (period certain), or continue if other lives remain alive (second life, third life contingencies)—reduce the monthly amount. These guarantees increase the insurer’s liability, so the payment is lowered to account for the longer expected payout, or the survival of other lives.

So the largest monthly income is from the pure life settlement option, because it has the fewest guaranteed extensions beyond the annuitant’s life.