Maryland Life and Health Insurance License Practice Exam

When does an immediate annuity begin making payments?

1. At the end of the first month

2. Immediately after purchase

3. After the first premium has been paid

4. At retirement age

The correct answer is: Immediately after purchase

An immediate annuity is designed to start making payments shortly after it is purchased. The unique aspect of an immediate annuity is that the owner essentially exchanges a lump sum payment for a series of payments that commence right away, typically within a month of the purchase. This immediate start is beneficial for individuals who need a steady income right at retirement or who desire fixed income payments for a specific period. The other options do not accurately describe the start time for an immediate annuity. Payments that begin "at the end of the first month" refer to a slight delay, which is not characteristic of immediate annuities. The option concerning payments commencing after the first premium has been paid is misleading because an immediate annuity typically requires a single payment rather than multiple premiums. Lastly, the choice of starting payments at retirement age suggests a plan typically associated with deferred annuities rather than immediate ones. Thus, the correct choice clearly clarifies that payments begin immediately after the purchase of the annuity.