How do annuities protect against longevity risk?

Annuities serve as a financial tool that addresses longevity risk by guaranteeing income for either a specified period or for the lifetime of the annuitant. Longevity risk refers to the possibility of outliving one's savings, a concern for individuals who may live longer than expected, resulting in potential depletion of their financial resources.

By establishing an annuity contract, individuals secure a consistent and predictable stream of income that can last for their entire life or for a certain number of years. This assurance enables them to mitigate the fear of running out of money in their retirement years. This feature is particularly beneficial in later years when individuals may not be earning active income and rely on their savings and investments for support.

In contrast, the other options do not effectively address longevity risk. A one-time lump sum payment does not provide ongoing financial support and can be exhausted quickly. Tax-free growth on investments does not assure the individual of consistent income but merely enhances the growth of their initial investment. While medical insurance is valuable, it does not pertain to ensuring ongoing income, which is the primary concern regarding longevity risk. Thus, guaranteeing a steady income stream through an annuity is the most effective way to protect individuals against the uncertainties of longevity.