Texas Life Agent Practice Exam

What financial feature do annuities primarily serve?

1. Guarantee of investment principal

2. The liquidation of principal and interest

3. Providing life coverage

4. Fixed rate of return

The correct answer is: The liquidation of principal and interest

Annuities primarily serve the financial feature of liquidating principal and interest, which means they are designed to provide a series of payments to the annuitant over a set period or for the annuitant's lifetime. This characteristic is fundamental to how annuities function, as they convert a lump sum of money (the principal) into a stream of income. When individuals purchase an annuity, they often do so with the intention of ensuring future income, especially for retirement purposes. The payments they receive can be structured in various ways, such as fixed amounts over a certain time frame or variable amounts depending on investment performance. This annuitization phase is what allows the individual to "liquidate" their investment in a way that provides financial support, rather than leaving the funds to remain as a large principal balance. Understanding this aspect of annuities is critical for those in the financial services industry, as it emphasizes the purpose of these products in income planning and financial security, particularly during retirement years. The other options, while related to certain aspects of financial products, do not encapsulate the primary service provided by annuities as effectively as the liquidation of principal and interest does.