What is an annuity?

What is an annuity?

• A. A financial product that typically provides a one-time payment
• B. A financial product sold by financial institutions that provides a stream of income over time
• C. A type of investment with high liquidity
• D. A government bond with guaranteed returns

Answer: (B)

An annuity is best defined as a financial product sold by financial institutions that provides a stream of income over time. This is achieved through a contract between the purchaser and the insurer, where the individual typically makes a lump-sum payment or a series of payments. In return, the insurer agrees to make regular payments to the individual, either for a fixed period or for the lifetime of the individual. Annuities are commonly used as a way to secure a steady income during retirement, making them distinct from other financial products that might offer one-time payments or lump sums. The structured payments over time offer predictability and financial security, particularly as individuals transition out of the workforce. Other options do not accurately reflect the characteristics of an annuity. For example, describing an annuity as providing a one-time payment misrepresents its fundamental purpose, which is to generate ongoing income. The mention of high liquidity contrasts with the typical illiquidity of annuities, as they usually have surrender charges if funds are accessed prematurely. Finally, characterizing an annuity as a government bond with guaranteed returns does not align with the definition, as government bonds are debt securities rather than income-generating contracts offered by insurance companies.

An annuity is best defined as a financial product sold by financial institutions that provides a stream of income over time. This is achieved through a contract between the purchaser and the insurer, where the individual typically makes a lump-sum payment or a series of payments. In return, the insurer agrees to make regular payments to the individual, either for a fixed period or for the lifetime of the individual.

Annuities are commonly used as a way to secure a steady income during retirement, making them distinct from other financial products that might offer one-time payments or lump sums. The structured payments over time offer predictability and financial security, particularly as individuals transition out of the workforce.

Other options do not accurately reflect the characteristics of an annuity. For example, describing an annuity as providing a one-time payment misrepresents its fundamental purpose, which is to generate ongoing income. The mention of high liquidity contrasts with the typical illiquidity of annuities, as they usually have surrender charges if funds are accessed prematurely. Finally, characterizing an annuity as a government bond with guaranteed returns does not align with the definition, as government bonds are debt securities rather than income-generating contracts offered by insurance companies.