California Life and Health Insurance Practice Exam

What differentiates a deferred annuity from an immediate annuity?

1. The duration of payment terms

2. The amount of initial investment

3. The time at which benefit payments start

4. The rate of return on investment

The correct answer is: The time at which benefit payments start

A deferred annuity is designed to accumulate funds over a certain period before making any benefit payments to the annuitant. This means that the payments do not begin immediately but are delayed until a specified future date. This feature is critical, as the accumulation phase allows the investment to grow without immediate taxation, which can be advantageous for long-term savings and retirement planning. In contrast, an immediate annuity starts making payments right after the initial investment, typically within a year, providing immediate income to the annuitant. This difference in the timing of when the benefit payments commence is the key distinguishing factor between the two types of annuities. While factors like the duration of payment terms, the amount of initial investment, and the rate of return on investment can vary between different products and can impact the choice of one type of annuity over another, they do not define the fundamental difference between deferred and immediate annuities. The essence of the distinction lies in when the benefit payments begin, making the starting time of these payments the critical differentiator.