Damian is age 79.He purchased a single life annuity contract that will pay him $4,000 per month for life.The expected return on the contract is:

Question

Quizplus · Accepted Answer

We can calculate the expected return by multiplying the monthly payment by the number of months in an expected lifetime. We can use actuarial tables to estimate Damian's life expectancy, or we can make a conservative estimate based on the fact that the contract is a single life annuity. According to the Social Security Administration, a 79-year-old male has a life expectancy of about 8 years. Multiplying $4,000 per month by 12 months per year and 8 years gives us an expected return of $384,000. However, since Damian is likely to receive payments for longer than 8 years, the actual expected return will be higher. Considering that the expected return must be at least the amount Damian paid for the annuity, which is likely to be several hundred thousand dollars or more, option C is the only realistic choice.

Damian Is Age 79