Advanced Diploma of Financial Planning (ADFP) Practice Test

An annuity is a financial product that provides a series of payments made at equal intervals. This can be either for a fixed period or for the lifetime of the individual. This characteristic makes options for receiving income predictable and allows individuals to budget for expenses, making annuities a popular choice for retirement planning.

In the context of financial planning, understanding that an annuity can convert a lump sum of money into a steady stream of income is critical. This stream of cash flows can be appealing for retirees looking for stability and assurance that they will have financial support over an extended time.

The other choices describe different financial instruments or concepts but do not accurately capture the essence of what an annuity is. A fixed payment plan based on a lump-sum investment, while related, does not encompass the broader functionality of annuities, which can also involve variable payments. Temporary insurance policies and savings accounts serve different purposes entirely in the realm of personal finance.