New Jersey Life Producer Practice Exam

What is the primary purpose of an annuity?

1. Providing Insurance Coverage

2. Tax-Deductible Investment

3. Generating Regular Income

4. Asset Protection

The correct answer is: Generating Regular Income

The primary purpose of an annuity is to generate regular income. Annuities are financial products that are designed to provide a steady stream of income, typically for retirement. Individuals often purchase annuities to ensure they have a reliable source of funds during their retirement years, mitigating the risk of outliving their savings. When an individual pays into an annuity, either as a lump sum or through a series of payments, the insurance company invests those funds and commits to making periodic payments to the individual, either immediately or at a future date. This structured payout is what makes annuities particularly appealing for those seeking financial security in retirement. While annuities may have certain tax advantages and can be used for asset protection, these are secondary functions and not the primary purpose. Unlike traditional insurance products that provide coverage against certain risks, annuities are specifically tailored for income needs over time.