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Question

Difficulty: MediumAnnuities and Insurance-Based Products

An investor holding a variable annuity contract enters the payout phase and selects a Life Annuity with a 10-Year Period Certain option. If the annuitant passes away 3 years after payments commence, which of the following statements correctly describes the handling of the remaining payments?

  1. Payments will continue to the designated beneficiary for the remaining 7 years.Answer
  2. B
    All remaining payments are immediately forfeited to the issuing insurance company upon the annuitant's death.
  3. C
    The beneficiary receives a tax-free lump-sum payout equal to the total original principal invested in the contract.
  4. D
    Payments will continue to the designated beneficiary for the rest of the beneficiary's lifetime.

Answer

Payments will continue to the designated beneficiary for the remaining 7 years.
A Life Annuity with a 10-Year Period Certain guarantees income payments for the annuitant's entire life, with a minimum guaranteed payout duration of 10 years. Because the annuitant died 3 years after annuitizing, the insurance company is contractually obligated to continue making the scheduled payments to the designated beneficiary for the remaining 7 years.

Step-by-Step Solution

1
Identify the annuity settlement option specified in the scenario.
The investor selected a Life Annuity with a 10-Year Period Certain option.
The chosen settlement option determines the insurer's payment obligations upon the annuitant's death.
2
Calculate the remaining period covered by the minimum guarantee.
10 years guaranteed−3 years paid=7 years remaining10 \text{ years guaranteed} - 3 \text{ years paid} = 7 \text{ years remaining}.
The period certain provision guarantees payout for at least 10 years regardless of when the annuitant dies within that window.
3
Determine the beneficiary entitlement.
The beneficiary receives payments for the remaining 7 years of the guaranteed period.
Because the annuitant died before the 10-year period elapsed, the insurer must fulfill the remaining guaranteed payments to the beneficiary.

Key Concept

Annuity Settlement Options and Period Certain Guarantees
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Topics

Annuities and Insurance-Based Products

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