An individual who purchases a Life annuity is primarily protected against what risk?

An individual who purchases a Life annuity is primarily protected against what risk?

• A. The risk of market loss
• B. The risk of living longer than expected
• C. The risk of inflation
• D. The risk of job loss

Answer: (B)

When an individual purchases a life annuity, they are essentially entering into a contract that will provide them with a steady stream of income for the rest of their life. This structure is particularly valuable because it safeguards the individual against the risk of outliving their financial resources, which is known as longevity risk. In other words, if a person lives longer than what is typically anticipated, a life annuity ensures that they will continue to receive income payments regardless of how many years they live. The annuity addresses this crucial concern as it shifts the longevity risk from the individual to the insurance company, which has actuarial data to manage and pool the risks associated with mortality. Thus, purchasing a life annuity provides a sense of security and peace of mind about one’s financial situation in later years, knowing that they will not run out of money due to an extended lifespan. Other options, while relevant to financial planning, do not capture the primary purpose of a life annuity. For instance, the risk of market loss relates to investments that fluctuate in value, inflation affects purchasing power but is typically managed through different financial tools, and the risk of job loss does not directly connect to the benefits offered by a life annuity.

When an individual purchases a life annuity, they are essentially entering into a contract that will provide them with a steady stream of income for the rest of their life. This structure is particularly valuable because it safeguards the individual against the risk of outliving their financial resources, which is known as longevity risk. In other words, if a person lives longer than what is typically anticipated, a life annuity ensures that they will continue to receive income payments regardless of how many years they live.

The annuity addresses this crucial concern as it shifts the longevity risk from the individual to the insurance company, which has actuarial data to manage and pool the risks associated with mortality. Thus, purchasing a life annuity provides a sense of security and peace of mind about one’s financial situation in later years, knowing that they will not run out of money due to an extended lifespan.

Other options, while relevant to financial planning, do not capture the primary purpose of a life annuity. For instance, the risk of market loss relates to investments that fluctuate in value, inflation affects purchasing power but is typically managed through different financial tools, and the risk of job loss does not directly connect to the benefits offered by a life annuity.