Mortality Guarantee in an annuity payout implies which of the following?

• A. If the annuitant lives longer than expected, the insurer incurs increased mortality cost
• B. The insurer guarantees a fixed rate of return
• C. The payments stop when the principal is returned
• D. The payments adjust for inflation

Answer: (A)

Mortality guarantee refers to the insurer taking on longevity risk: the payments are guaranteed for as long as the annuitant lives, so if the person outlives the actuarial expectation, the insurer must fund a longer stream of payments. When longevity exceeds expectations, the insurer incurs increased mortality cost because more payments are made than anticipated. The other options don’t fit because this guarantee isn’t about a fixed rate of return, stopping payments after returning principal, or adjusting payments for inflation.