Which of the following best describes a pure life annuity settlement option? a) Payments continue until the annuitant’s death, with no residual value. b) Payments continue for a fixed period regardless of the annuitant’s survival. c) Payments continue to a beneficiary upon the annuitant’s death. d) Payments fluctuate based on investment performance.
The Correct Answer and Explanation is :
The correct answer is a) Payments continue until the annuitant’s death, with no residual value.
Explanation:
A pure life annuity is a type of annuity where the annuitant receives periodic payments for the duration of their lifetime. The key characteristic of a pure life annuity is that payments stop upon the annuitant’s death, and there is no provision for a beneficiary to receive payments after the annuitant’s passing. The amount of each payment is typically determined based on the annuitant’s age, gender, and life expectancy, as well as the amount of money invested into the annuity.
Here’s a breakdown of the answer choices:
- a) Payments continue until the annuitant’s death, with no residual value – This is the correct definition of a pure life annuity. The annuity will provide income only for the annuitant’s lifetime, and once they die, payments cease. There is no death benefit or residual value passed on to beneficiaries.
- b) Payments continue for a fixed period regardless of the annuitant’s survival – This describes a fixed period annuity (also known as a term certain annuity), where payments are made for a specified number of years, regardless of whether the annuitant is alive. It is not a pure life annuity.
- c) Payments continue to a beneficiary upon the annuitant’s death – This describes a joint and survivor annuity or a life annuity with a beneficiary option, where the payments continue to a designated beneficiary after the annuitant’s death. This is not a pure life annuity because it includes residual value for beneficiaries.
- d) Payments fluctuate based on investment performance – This describes a variable annuity, where the payment amount varies depending on the performance of underlying investments, such as stocks or bonds. A pure life annuity, on the other hand, provides fixed payments regardless of market performance.
In conclusion, a pure life annuity ensures income for the annuitant’s lifetime without any additional benefits for heirs. This simplicity is a key factor for those seeking to reduce the risk of outliving their savings.