South Carolina Life Insurance Practice Exam

What are the two classifications of annuities according to the time when annuity payments begin?

1. Fixed and variable

2. Immediate and deferred

3. Single and joint

4. Life and term

The correct answer is: Immediate and deferred

The classification of annuities based on the timing of when annuity payments begin is divided into immediate and deferred categories. Immediate annuities start making payments to the annuitant right after a lump-sum payment is made. This means that the individual who purchases the annuity begins to receive regular payments almost immediately, typically within one year of the purchase. This type of annuity is ideal for those who want to secure an income stream right away, such as retirees looking to generate regular income from their savings. On the other hand, deferred annuities begin their payments at a future date, which can be several years after the initial investment. During the accumulation phase, the funds in the annuity can grow on a tax-deferred basis until the owner decides to start receiving payouts. This can be beneficial for individuals who are saving for retirement or those who want their investment to grow before they start drawing from it. This distinction is essential for understanding how annuities function and choosing the right type based on financial goals and timelines.