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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Comparison of Products Across Categories

Mr. Reddy, aged 58, plans to retire at 60 and wants to compare an annuity from an insurer with a systematic withdrawal plan (SWP) from a balanced mutual fund. He wants income that is guaranteed for life regardless of how long he lives. Which choice best addresses this specific need?

An immediate life annuity best meets the need because the insurer pays income for as long as he lives, transferring longevity risk away from him. An SWP depends on market performance and may exhaust the corpus, and the other options do not guarantee lifelong payments.

  1. ASWP from a balanced fund, because the corpus is certain to last
  2. BAn immediate annuity with life-long payout, because longevity risk is transferred to the insurerCorrect
  3. CA bank savings account, because it assures inflation-adjusted income
  4. DA tax-free bond, because it pays until the investor's death

Explanation

Only a life annuity pools longevity risk and pays for life irrespective of lifespan. An SWP depends on market returns and the corpus can be exhausted; savings accounts and bonds do not guarantee lifetime or inflation-adjusted income.

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