Tennessee Life Producer Practice Exam

What is the primary function of an annuity?

1. To accumulate wealth for the long term.

2. The systematic liquidation of accumulated funds.

3. To provide immediate cash benefits to the insured.

4. To ensure a guaranteed death benefit.

The correct answer is: The systematic liquidation of accumulated funds.

The primary function of an annuity is to provide a systematic liquidation of accumulated funds. Annuities are financial products that convert a lump sum of money into a stream of payments over time. This can be particularly beneficial for individuals who wish to ensure a steady income during retirement. When someone invests in an annuity, they typically make a single lump sum payment or a series of payments over time, accumulating a principal amount that can later be accessed through regular withdrawals. The "liquidation" aspect refers to the process of slowly drawing down this accumulated capital, allowing the annuitant to receive regular income, which is particularly useful for long-term financial planning and managing expenses in retirement. While accumulating wealth for the long term is one aspect of some annuity products, the core purpose is indeed to facilitate this systematic withdrawal of funds over the annuitant's lifetime or over a specified period. This makes option B the most accurate representation of the primary function of an annuity.