Longevity risk refers to the risk that policyholders may live longer than initially estimated. In the context of lifelong annuity contracts, this risk directly impacts the profitability of the insurance company. Lifelong annuity contracts are structured such that the insurer agrees to make regular payments to the policyholder from a certain age until their death. If the policyholder lives longer than initially estimated, the insurer is obligated to continue making these payments for a longer period. This results in higher costs for the insurer, thereby reducing their profitability. Therefore, an increase in longevity risk decreases the profits made by the insurer.

Choice A is incorrect. Longevity risk, or the potential increase in the average lifespan of policyholders, does not increase profits made by the insurer. In fact, it's quite the opposite. If policyholders live longer than expected, insurers will have to make more payments than initially planned, which can lead to a decrease in profitability.

Choice C is incorrect. While longevity risk may impact the return on investment for an insurance company due to increased payouts over time, it does not directly reduce the return on investment to the policyholder. The return on investment for a policyholder is typically determined by factors such as premium rates and terms of contract rather than longevity risk.

Choice D is incorrect. Longevity risk certainly has an effect on the profitability of an insurance company offering lifelong annuity contracts. As mentioned earlier, if policyholders live longer than expected, this means that insurers will have to make more payments over time, which can negatively impact their profitability.