Quick Review: An annuity is a contract in which an insurance company promises to make a series of periodic payments-usually defined as a sequence lasting for life-in exchange for either a large single premium collected at the beginning of the contract's term or a series of smaller premiums collected before the start of the annuity's initial payment date. An annuity for which the entire premium is collected at the beginning of the contract's term and that begins payments shortly thereafter is called an immediate annuity. Assume that 11 80-year-old investors each contribute $5,000 at the beginning of the year so they can collectively purchase a $55,000 certificate of deposit (CD) that matures in one year and pays interest of 3%. Each investor expects to receive $5,000 in principal plus $ [Select] in interest one year from today, for a total of $ [Select] each. This calculation assumes that each member of the pool receives a pro-rata return from a CD with a total maturity value of $ [Select ] for all the investors. Suppose the 11 investors decide that if any one of them fails to survive until the CD's maturity date, the share owed to that investor will be distributed to the remaining living members. If one member fails to survive the requisite period, the remaining members divide the CD proceeds into 10 shares, each of which is worth $ [Select] (instead of $5150). By pooling risk, the survivors have reaped a mortality credit !!! Pooling works in life insurance as well. Quick Review: An annuity is a contract in which an insurance company promises to make a series of periodic payments-usually defined as a sequence lasting for life-in exchange for either a large single premium collected at the beginning of the contract's term or a series of smaller premiums collected before the start of the annuity's initial payment date. An annuity for which the entire premium is collected at the beginning of the contract's term and that begins payments shortly thereafter is called an immediate annuity. Assume that 11 80-year-old investors each contribute $5,000 at the beginning of the year so they can collectively purchase a $55,000 certificate of deposit (CD) that matures in one year and pays interest of 3%. Each investor expects to receive $5,000 in principal plus $ [Select] in interest one year from today, for a total of $ [Select] each. This calculation assumes that each member of the pool receives a pro-rata return from a CD with a total maturity value of $ [Select ] for all the investors. Suppose the 11 investors decide that if any one of them fails to survive until the CD's maturity date, the share owed to that investor will be distributed to the remaining living members. If one member fails to survive the requisite period, the remaining members divide the CD proceeds into 10 shares, each of which is worth $ [Select] (instead of $5150). By pooling risk, the survivors have reaped a mortality credit !!! Pooling works in life insurance as well
