Arkansas Life and Health Insurance Practice Exam

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From a tax standpoint, what is the benefit of receiving income benefit payments as opposed to cashing out an annuity after it has been held for several decades?

  1. All income is tax-free

  2. Only capital gains are taxed

  3. Taxes are only due on the amount of tax-deferred earnings in each payment

  4. The principal amount is taxed at a lower rate

The correct answer is: All income is tax-free

Receiving income benefit payments from an annuity, as opposed to cashing it out after holding it for several decades, offers the benefit of having all income tax-free. This means that the money received through income benefits will not be subject to taxation. This tax advantage is a key reason why many individuals choose to receive income benefit payments rather than cashing out the annuity.

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