Certified Financial Consultant (CFC) Practice Exam

Which of the following is TRUE regarding the accumulation period of an annuity?

1. It is also referred to as the annuity period

2. It is a period of time during which the beneficiary receives income

3. It is limited to 10 years

4. It is a period during which the payments into the annuity grow tax deferred

The correct answer is: It is a period during which the payments into the annuity grow tax deferred

The accumulation period of an annuity is indeed a phase during which the payments made into the annuity grow tax-deferred. This means that the investment can compound without being subject to income tax until withdrawals begin, typically during the distribution phase when the annuity starts to pay out. This tax deferral feature is a significant advantage of annuities, as it allows the invested funds to potentially grow at a faster rate compared to taxable investment accounts. In the context of the other options, the reference to the accumulation period as the annuity period is misleading; the annuity period typically pertains to the distribution phase. The idea that it is limited to 10 years is inaccurate, as the duration of the accumulation period can vary widely depending on the terms of the annuity contract and the chosen payment schedule. Furthermore, the assertion that it is a time when the beneficiary receives income is incorrect, as income payments to beneficiaries usually occur during the distribution phase, not during the accumulation period itself.