4. Which of the following is a characteristic of a deferred annuity?
Answer: B
Tax-deferred growth is a characteristic of a deferred annuity.
Deferred annuities are designed to allow investments to grow on a tax-deferred basis, meaning that the earnings accumulate without being taxed until they are withdrawn. This feature makes them an attractive option for individuals looking to save for retirement.
A) Payments begin immediately
This statement is incorrect as deferred annuities do not provide immediate payments. Instead, they are structured to accumulate funds over time before any withdrawals or payouts begin, distinguishing them from immediate annuities which start payments right away.
B) Tax-deferred growth
This option accurately describes a key feature of deferred annuities. The investments made in a deferred annuity grow without immediate tax implications, allowing for potentially greater accumulation of funds until withdrawal, typically during retirement.
C) Guaranteed withdrawals
This option is misleading as it implies that all deferred annuities come with guaranteed withdrawal options. While some may offer guaranteed withdrawal benefits, it is not a defining characteristic of deferred annuities in general, which primarily focus on tax-deferred growth.
D) No surrender charges
This statement is incorrect as most deferred annuities typically include surrender charges if the investor withdraws funds before a specified period. These charges are designed to discourage early withdrawal and protect the insurer's investment.
Conclusion
Tax-deferred growth is the defining feature of deferred annuities, allowing for accumulation without immediate tax consequences. Options A, C, and D fail to accurately represent the core characteristics of deferred annuities, while B clearly encapsulates the primary benefit of such investment vehicles.