Arizona Life and Health Practice Exam

In the context of life annuities, where do funds for additional benefit payments primarily come from?

1. Investments made by the insurer

2. Premiums of current policyholders

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

4. Government grants

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

In the context of life annuities, the funds for additional benefit payments primarily come from amounts that are not distributed to life annuitants who have died before reaching their expected life expectancy. When an individual purchases a life annuity, they essentially exchange a lump sum for regular income payments over the course of their lifetime. If the annuitant dies before reaching the anticipated life span, the insurer retains the unutilized funds, which can then be used to help satisfy additional benefit payments to other annuitants. This mechanism works on the principles of pooled risk and mortality assumptions, which are fundamental to how insurance and annuity products operate. The premiums collected from policyholders and the investment income generated by the insurer contribute to the overall financial health of the annuity product, but the specific source for funds allocated to additional benefit payments primarily comes from these retained amounts. Understanding this helps illuminate the financial dynamics of life annuities, where the pooling of funds and risk-sharing among participants plays a crucial role in ensuring that benefits can be sustained for those who live longer than the average life expectancy.