When electing annuitization and selecting a low assumed interest rate, how are the monthly annuity payments affected?

Selecting a low assumed interest rate during annuitization directly impacts the calculation of monthly annuity payments. When an insurer calculates the payments for fixed-income annuities, they use an assumed interest rate to determine how much the underlying investment will yield over the annuitant's lifetime.

With a low assumed interest rate, the insurer anticipates lower returns, which leads to smaller monthly payments, as they have to spread out the total benefit over the expected duration of the payments. However, if actual investment performance exceeds the low assumed interest rate, the payments can actually increase. This is because the insurer may benefit from additional investment income beyond what was originally projected, allowing for the potential for higher payments in the future. This situation reflects a favorable investment climate that can lead to better than expected outcomes for annuitants.

Thus, when a low interest rate is used, the potential for increased monthly payments exists if the investment performance is strong—meaning that the correct choice reflects the relationship between low assumed rates and improved future payments under good investment conditions.