South Carolina Life and Health Practice Exam

What type of coverage can an annuity provide after a lump sum payment?

1. Immediate cash payment

2. Regular income payments

3. Permanent life coverage

4. Term life benefits

The correct answer is: Regular income payments

An annuity is a financial product designed to provide a series of payments at regular intervals, typically after an individual makes a lump sum payment. When someone purchases an annuity, they are essentially converting their lump sum into a stream of income, which is often referred to as regular income payments. This income can be structured in various ways, such as monthly, quarterly, or annually, and can last for a predetermined number of years or for the lifetime of the annuitant. The primary purpose of this arrangement is to ensure that the individual receives a steady income, which can be particularly beneficial during retirement when consistent cash flow is important for covering living expenses. While immediate cash payment might seem plausible, annuities are specifically built for income generation over time rather than providing a one-time payout. Permanent life coverage and term life benefits relate to life insurance products, which serve a different purpose and are not associated with the functioning of annuities. Therefore, the option indicating that annuities provide regular income payments aligns perfectly with their intended use and characteristics.