Question

Patrick is age 67 and receives Social Security retirement income that covers 60 percent of his monthly expenses. He has no dependents. He would like to invest $200,000 in an annuity that will mitigate inflation and provide him with the highest monthly income. Although he has a 20-year table life expectancy, he thinks he has a much longer life expectancy. Which annuity is most suitable for Patrick?

A) Single premium annuity
B) A deferred, fixed annuity
C) A single-premium, variable annuity
D) A single-premium, variable annuity with a guaranteed term equal to his table life expectancy

Answer 1

The most suitable annuity for Patrick is option C) A single-premium, variable annuity because it will provide a potential hedge against inflation with the possibility of higher returns, which could result in higher monthly income.

Step-by-step explanation:

Patrick, being age 67 and anticipating a longer life expectancy than the 20-year table suggests, should choose an annuity that provides income while mitigating inflation. Option C) A single-premium, variable annuity would be the most suitable for Patrick because it offers the potential for investment growth which can help to offset the erosive effect of inflation over time. A variable annuity allows investment in various funds, similar to mutual funds, which means his annuity payments may increase if the investments perform well, thus potentially offering a hedge against inflation while providing higher monthly income. Option D) A single-premium, variable annuity with a guaranteed term equal to his table life expectancy could also be suitable if it includes provisions for income beyond the guaranteed term, as this would provide income for his entire life, considering he expects to live longer than the life expectancy table indicates.