Colorado Life Producer License Practice Test

Which type of annuity generates immediate cash value due to a lump sum payment?

1. Lifespan annuity

2. Variable annuity

3. Single premium annuity

4. Deferred annuity

The correct answer is: Single premium annuity

The single premium annuity is designed to generate immediate cash value as it is purchased with a one-time lump sum payment. This type of annuity requires the policyholder to make a single upfront payment, and in return, it provides immediate benefits, such as cash payouts or the accumulation of cash value, depending on the terms of the contract. With a single premium annuity, the entire investment is made at once, which allows the annuity to start providing income or to begin accumulating value right away. This makes it an appealing choice for individuals looking to invest their savings in a product that will begin to pay out immediately, whether for income during retirement or other financial planning needs. In contrast, other types of annuities, such as variable and deferred annuities, involve different structures related to cash value accumulation and payout timing. For instance, a variable annuity may require ongoing premium payments and typically does not guarantee immediate cash value, while a deferred annuity is designed to delay payments until a future date, thus lacking immediate cash value upon the initial investment. A lifespan annuity, also known as a life annuity, is often focused on providing income for the duration of an individual's life rather than generating immediate cash value.