Massachusetts Life Producer Practice Exam

Which statement correctly defines a deferred annuity?

1. Payments are made immediately after purchase

2. Contributions are made over time before income payouts begin

3. It provides a lump-sum payment upon retirement

4. Benefits are distributed for a limited time only

The correct answer is: Contributions are made over time before income payouts begin

A deferred annuity is designed to accumulate funds over time, where contributions are made regularly before the actual income payouts begin. This means that the investor can contribute to the annuity for a specified period, allowing the investment to grow tax-deferred until the individual decides to begin receiving payments at retirement. During the accumulation phase, the funds can earn interest or investment returns, enhancing the overall value when payouts commence. In contrast, the other options convey different characteristics. Immediate annuities, for instance, start disbursing payments right after purchase, which doesn't apply to deferred annuities. Similarly, while some annuities can provide a lump-sum payment, this is typically a characteristic of certain types of contracts rather than defining all deferred annuities. Lastly, the distribution of benefits for a limited time only generally describes particular types of annuities or policies, which does not reflect the nature of deferred annuities that allow for payment over a longer period or even for the lifetime of the annuitant.