Massachusetts Life Producer Practice Exam

If Sarah, a life annuitant aged 88, continues to receive payments after life expectancy, where do the funds primarily come from?

1. New contributions made to the annuity

2. Funds not distributed to life annuitants who died before life expectancy

3. The principal amount contributed at the start of the annuity

4. Investments made by the annuity provider

The correct answer is: Funds not distributed to life annuitants who died before life expectancy

In the context of annuity payments, if Sarah continues to receive payments beyond her life expectancy, these payments primarily come from the funds that were not distributed to other life annuitants who passed away before reaching their own life expectancy. Annuities are designed to pool risk among a group of annuitants. The life expectancy factor is calculated based on average lifespans, and not all participants will live to their expected age. Those who pass away early essentially contribute to a pool of funds that can be used to pay the annuitants who live longer than expected, like Sarah in this scenario. Therefore, Sarah's payments after her life expectancy are effectively financed by the contributions made from the premiums of those who did not live as long. This understanding of risk pooling is crucial in comprehending how annuities function financially and why it is the remaining pool of funds from other life annuitants that supports ongoing payments.