What defines an immediate annuity compared to a deferred annuity?

What defines an immediate annuity compared to a deferred annuity?

• A. Starts cash flows after a specified period
• B. Pays out immediately after a lump sum investment
• C. Guaranteed payments for the lifetime of the insured
• D. Requires annual contributions for a minimum period

Answer: (B)

An immediate annuity is defined by its feature of starting cash flows immediately after a lump sum investment. When an individual purchases an immediate annuity, they typically make a one-time payment, and in return, they begin to receive regular income payments almost instantly, often within a month. This immediate return contrasts with deferred annuities, where the payments begin at a later date, usually after a specified investment accumulation period. The other options describe aspects of annuities but do not define immediate annuities correctly. For instance, while guaranteed payments for the lifetime of the insured may be a characteristic of some types of annuities, it is not exclusive to immediate annuities. Likewise, the requirement for annual contributions or a minimum period is typical of deferred annuities, which emphasize the accumulation phase before payouts commence.

An immediate annuity is defined by its feature of starting cash flows immediately after a lump sum investment. When an individual purchases an immediate annuity, they typically make a one-time payment, and in return, they begin to receive regular income payments almost instantly, often within a month. This immediate return contrasts with deferred annuities, where the payments begin at a later date, usually after a specified investment accumulation period.

The other options describe aspects of annuities but do not define immediate annuities correctly. For instance, while guaranteed payments for the lifetime of the insured may be a characteristic of some types of annuities, it is not exclusive to immediate annuities. Likewise, the requirement for annual contributions or a minimum period is typical of deferred annuities, which emphasize the accumulation phase before payouts commence.