Paralegal Advanced Competency Exam (PACE) Practice Exam

What does an annuity primarily act as in financial terms?

1. A contract between an insurance provider and the purchaser

2. A savings account with guaranteed returns

3. A form of life insurance

4. A loan agreement with fixed payments

The correct answer is: A contract between an insurance provider and the purchaser

An annuity primarily acts as a contract between an insurance provider and the purchaser. This type of financial instrument is established to provide a series of payments made at regular intervals, often for retirement income. When an individual purchases an annuity, they typically agree to make a lump-sum payment or a series of payments to the insurance company. In return, the insurance provider then commits to making periodic payments to the individual, which can begin immediately or at a future date, depending on the terms of the contract. This contractual nature is essential because it delineates the obligations of both parties: the payment terms for the purchaser and the promise of future income from the insurer. The structure of the annuity can vary, with options for fixed or variable payments, and this contract is designed to manage the risk of outliving one’s savings by providing a steady income stream. In contrast, the other options, while related to financial products, do not capture the essence of what an annuity is. An annuity is not merely a savings account, a form of life insurance, or a loan agreement; it has its unique characteristics and functions that primarily revolve around the contract formed between the insurer and the individual purchasing the annuity.