Which of the following is associated with an immediate annuity?
A. Tax-free benefit payments.
B. Installment premium payments.
C. Lack of an accumulation period.
D. Lump-sum benefit.
The Correct Answer and Explanation is :
The correct answer is C. Lack of an accumulation period.
Explanation:
An immediate annuity is a financial product in which the purchaser makes a lump sum payment to an insurance company in exchange for the promise of periodic income payments, which begin almost immediately, usually within one month of the initial payment. The purpose of an immediate annuity is to provide a steady stream of income for a specified period or for the lifetime of the annuitant.
Let’s break down the options:
- A. Tax-free benefit payments: This is not typically associated with immediate annuities. In most cases, the income payments from an immediate annuity are subject to taxation. The portion of the payment that represents earnings (interest) is taxable, while the portion that represents the return of principal may not be taxable.
- B. Installment premium payments: This is more characteristic of a deferred annuity rather than an immediate annuity. In a deferred annuity, the annuitant makes premium payments over time (installments) before the income payments begin at a later date, whereas an immediate annuity requires a lump sum payment upfront.
- C. Lack of an accumulation period: This is the correct answer. In an immediate annuity, there is no accumulation period. The accumulation period is the time during which the annuitant contributes money to the annuity, typically seen in deferred annuities. With an immediate annuity, the focus is on converting a lump sum payment into immediate income, so the annuitant skips the accumulation phase and starts receiving payments right away.
- D. Lump-sum benefit: While an immediate annuity involves a lump sum payment upfront, the benefit payments are not a lump sum. Instead, they are periodic payments, often monthly or annually, made over the life of the annuity or a predetermined period.
In summary, an immediate annuity is distinguished by the lack of an accumulation period since it starts paying out almost immediately after the lump sum payment is made.