What is the main difference between immediate and deferred annuities?

• A. Deferred annuities are only available to institutional investors, while immediate annuities are available to individuals.
• B. Immediate annuities begin payments to the investor right after the initial investment, while deferred annuities start payments at a future date.
• C. Immediate annuities offer higher interest rates than deferred annuities.
• D. Deferred annuities require a lump-sum payment, while immediate annuities are paid in installments.

Answer: (B)

Verified step by step guidance

1. Understand the concept of an annuity: An annuity is a financial product that provides a series of payments to an individual, typically used for retirement planning. Payments can be immediate or deferred based on the type of annuity.
2. Define immediate annuities: Immediate annuities begin payments to the investor shortly after the initial investment is made. This is typically used by individuals who need income right away.
3. Define deferred annuities: Deferred annuities start payments at a future date, allowing the investment to grow over time before disbursements begin. This is often used by individuals planning for retirement income later in life.
4. Compare the timing of payments: The key difference is the timing of payments. Immediate annuities provide payments right after the investment, while deferred annuities delay payments to a specified future date.
5. Clarify misconceptions: Immediate and deferred annuities are available to both individuals and institutional investors, and the payment structure (lump-sum or installments) depends on the specific terms of the annuity contract, not the type of annuity.