During the ACCUMULATION phase of a deferred annuity, which of the following best describes the contract's status?

Explanation

A deferred annuity has two distinct phases: ACCUMULATION (or 'pay-in' phase) — premiums earn interest tax-deferred under IRC §72, with no scheduled distributions; and ANNUITIZATION (or 'pay-out' phase) — the contract converts the accumulated value into a stream of income payments. During accumulation the owner may surrender the contract for cash (less any applicable surrender charges and possible 10% IRS penalty if under 59½). The response describing level monthly income computed from life expectancy with no surrender right describes the annuitization (payout) phase instead. The response in which the insurer pays out only the interest each year and withholds principal until annuitization invents a non-existent payout rule. And the response taxing the interest credited every year is wrong — annuity inside-buildup is tax-DEFERRED, not currently taxed, which is the very purpose of the annuity tax shelter.