Annuities✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
Which statement best describes the basic function of an annuity?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
An annuity is essentially the reverse of life insurance: instead of creating a lump sum payable at death, it liquidates a principal sum plus interest over a period of time, typically for the annuitant's lifetime. The insurer assumes the risk that the annuitant will live longer than the funds would otherwise last, converting accumulated savings into a steady income stream. This liquidation function is the core concept underlying both the accumulation and distribution phases of the contract.
Why the other options are wrong
- B) A single lump-sum death benefit is the function of life insurance; an annuity pays income over time rather than one lump sum at death.
- C) An annuity does not guarantee a market-matching return; fixed annuities guarantee only a minimum rate, and variable annuities carry market risk.
- D) Premiums paid into a nonqualified annuity are made with after-tax dollars and are not deductible; the tax advantage is deferred growth, not a deduction.
Memory hook
An annuity liquidates a pile into a paycheck: principal plus interest paid out over time, usually for life.