Colorado Life Producer License Practice Test

What are the two primary phases of an annuity?

1. Accumulation and liquidation

2. Investment and return

3. Accumulation and annuitization

4. Growth and distribution

The correct answer is: Accumulation and annuitization

The two primary phases of an annuity are accumulation and annuitization. During the accumulation phase, the annuity owner makes contributions, which can grow on a tax-deferred basis until it's time to withdraw funds. This phase is essential for building the value of the annuity through either a lump-sum investment or periodic payments made over time. The growth in value can derive from various investment options, depending on whether it's a fixed, variable, or indexed annuity. Once the owner decides to start receiving income from the annuity, the annuitization phase begins. In this phase, the accumulated funds are converted into a stream of income, which is paid out over a specified period or for the lifetime of the annuitant. The annuitization phase is critical because it transforms the investment into a reliable source of income, ensuring that individuals can secure their financial needs during retirement. Other options do not capture the phases as precisely as the terms "accumulation" and "annuitization," which are specific to the structure and function of annuities.