Which type of joint life or single life annuity would provide the lowest initial level of annuity income for a given fund?

Prepare for the Qualified Financial Adviser (QFA) Pensions Exam 2. Test your knowledge with flashcards and multiple choice questions. Review detailed explanations for each question and get ready to succeed!

Multiple Choice

Which type of joint life or single life annuity would provide the lowest initial level of annuity income for a given fund?

Explanation:
The key idea is how the starting cash flow from a fund is shaped by how long payments are expected to last and how many lives are covered. Escalating payments start lower because part of the fund is reserved to increase payments in later years. A joint-life arrangement involves two lives, so the expected duration of payments is longer on average than for a single life, which pushes the upfront payment down to keep the fund adequate. Put together, escalating and joint life compound the effects, giving the smallest initial level of annuity income for a given fund.

The key idea is how the starting cash flow from a fund is shaped by how long payments are expected to last and how many lives are covered. Escalating payments start lower because part of the fund is reserved to increase payments in later years. A joint-life arrangement involves two lives, so the expected duration of payments is longer on average than for a single life, which pushes the upfront payment down to keep the fund adequate. Put together, escalating and joint life compound the effects, giving the smallest initial level of annuity income for a given fund.

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