Question 6

An Immediate annuity can be recognized by a payout that begins one payment period after purchase.

An immediate annuity is characterized by the fact that the payout starts right away, typically within a month of the purchase, thereby providing immediate income to the annuitant.

A) Payout begins one payment period after purchase.

This option accurately describes an immediate annuity, as it signifies that the annuity payments commence shortly after the initial investment, reflecting the fundamental nature of immediate annuities.

B) Payout begins several years later.

This option is incorrect because it describes a deferred annuity, where payouts begin at a later date, typically years after the purchase, which is contrary to the concept of an immediate annuity.

C) Only an annual payout period will apply.

This statement is misleading, as immediate annuities can offer various payout periods, including monthly, quarterly, or annual payments. Thus, it does not accurately define an immediate annuity.

D) The annuitant must be in good health.

This option is also incorrect. An immediate annuity does not impose health requirements on the annuitant; anyone can purchase one regardless of their health status, making this criterion irrelevant.

Conclusion

Option A is definitively correct as it encapsulates the core feature of an immediate annuity—immediate payouts following the purchase. In contrast, the other options misinterpret the characteristics of immediate annuities, either by relating them to deferred annuities or imposing unrelated conditions.