During a divorce settlement, an ex-husband purchases an annuity to be paid quarterly for the life of his ex-wife. The wife learns she is terminally ill and dies two months later, before any payments are made. The ex-husband sues to rescind the annuity. Will he succeed?

• A. Yes, because death of the payee nullifies the contract.
• B. No, because the ex-husband assumed the risk of her death.
• C. Yes, because the annuity is for life.
• D. No, because there was misrepresentation.

Answer: (B)

The main idea is that a life-contingent contract allocates the risk of the payee’s death to the person who buys the arrangement. A life annuity is payable for the life of the annuitant, so the contract ends when that person dies. By purchasing an annuity to be paid for her life, the ex-husband assumed the risk that she might die before any payments are made. When she dies, there is no obligation left to perform, and there’s no basis for rescission because there was no misrepresentation or other improper conduct. So he cannot rescind the contract.

The other options don’t fit: death of the payee does not “nullify” the contract in a way that requires rescission; the fact that the annuity is for life explains why payments wouldn’t occur after death rather than providing a right to rescind; and there’s no misrepresentation shown.