AD Banker Comprehensive Practice Exam

One of the benefits of an annuity in regards to taxes is:

1. Premiums are tax deferred

2. Premiums are tax deductible

3. Death benefits are income tax free

4. Earnings are tax deferred during the accumulation phase

The correct answer is: Earnings are tax deferred during the accumulation phase

An annuity offers several tax advantages, particularly during its accumulation phase, which is when the investment grows before any distributions are made. The earnings on the investment within the annuity are not taxed annually, allowing the money to grow without immediate tax liability. This is beneficial for long-term growth, as it allows the full amount of the contributions and earnings to compound over time without the burden of taxes reducing the investment’s growth potential. In contrast, options regarding tax deductibility of premiums are generally not applicable to all types of annuities and often only apply in specific contexts, such as employer-sponsored plans. Although death benefits can be income tax-free in certain circumstances, that does not apply to the growth of the investment itself during the accumulation phase. Thus, the ability to defer taxation until withdrawals begin is a significant and distinct advantage of choosing an annuity. This feature makes option regarding earnings being tax deferred during the accumulation phase the most accurate representation of the benefits related to taxes.