Question

Jill is a 55-year-old widow with no source of income. Her husband just died and she has received insurance proceeds from a policy on his life. She wants to invest in an annuity that will produce income starting today and continuing until she plans to collect Social Security, at age 65. She wants to receive the most she can in monthly income. Which of the following is the most suitable annuity for Jill based on her objectives?

1) Immediate annuity
2) Deferred annuity
3) Fixed annuity
4) Variable annuity

Answer 1

An immediate annuity is the most suitable option for Jill, providing her with a consistent source of income right away and for the next 10 years until she receives Social Security benefits. This option aligns with her need for income without delay given that other annuity types do not offer immediate payouts or have investment risks that Jill might prefer to avoid. Therefore, the correct option is 1.

Step-by-step explanation:

Based on Jill's objectives of receiving income immediately and continuing up to when she plans to collect Social Security at age 65, the most suitable annuity for her would be an immediate annuity. An immediate annuity is designed to provide regular payments right away, which suits Jill's need for a source of income now that she has lost her husband's financial support. Given her age and the time frame of 10 years until she receives Social Security benefits, this type of annuity ensures that she will have a consistent cash flow during this period. Other options like deferred annuity would only start paying out at a later date, which does not align with her need for current income. A fixed annuity could offer stable payments, but it might not provide the immediate start of income she needs. A variable annuity involves investment risks and uncertainty in payment amounts, which Jill may want to avoid given her lack of other income sources. Hence, an immediate annuity is the most prudent option to meet her immediate financial needs while waiting to qualify for Social Security benefits.

It's important to note that with an immediate annuity, rates of return could be lower than more volatile investments like stocks or bonds, but the certainty of payment might be a preferable tradeoff for Jill at this stage in her life. Additionally, as a widow, she should be aware of the benefits she may receive from Social Security upon reaching the age of 65, as the widow of a qualified worker. However, to address potential inflation and loss of buying power over time, she should consider whether an annuity with a cost-of-living adjustment (COLA) feature is available to her, which would provide income that increases over time.