What is a 'life annuity contract"? How is its 'actuarial present value' determined?

A life annuity contract is a financial product that provides a series of periodic payments to an individual for the duration of their life, starting at a specified time. The contract is typically entered into by a person (the annuitant) with an insurer or financial institution, where the individual agrees to make an initial lump sum payment or a series of payments in exchange for the guarantee of regular income for the rest of their life. This arrangement is commonly used in retirement planning, ensuring the annuitant has a steady income stream once they retire.

The primary aim of a life annuity is to mitigate the financial risk that an individual might outlive their savings, as the insurer assumes the risk of the individual’s longevity. These contracts are also structured so that the annuitant’s monthly payments do not change over time, providing financial security in the face of inflation or market volatility.

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