PSI Ohio Insurance Practice Exam

What is the accumulation period in an annuity characterized by?

1. The period where interest is credited on a tax-deferred basis

2. The time when premiums must be paid

3. The duration of investment until the annuity begins

4. The phase where withdrawals are allowed without penalties

The correct answer is: The period where interest is credited on a tax-deferred basis

The accumulation period in an annuity is primarily characterized by the phase during which the funds deposited into the annuity grow, and interest is accrued on a tax-deferred basis. During this time, the owner of the annuity pays premiums or makes contributions, and these funds earn interest, which is not subject to taxes until they are withdrawn. The tax-deferred nature of the growth during the accumulation period is a significant feature, allowing the investment to compound without the immediate impact of taxation, maximizing the potential growth of the annuity over time. While premiums must indeed be paid to fund the annuity, and investment duration does play a role in the overall structure, the essence of the accumulation period is rooted in how the investment grows and the tax advantages associated with it. Similarly, withdrawals typically have restrictions and may incur penalties, emphasizing that the accumulation period is primarily focused on growth rather than access to funds.