32. An employee has just received a huge bonus check. She uses the bonus money to buy an annuity that will immediately begin paying $400 a month to her. This is called a
Answer: C
This is called a single-premium immediate annuity.
The employee's purchase of an annuity that begins paying out immediately aligns with the definition of a single-premium immediate annuity, which requires a one-time payment and starts disbursing income shortly thereafter.
A) deferred annuity.
A deferred annuity is designed to accumulate funds over time before making payouts, which does not apply in this scenario. Since the employee is receiving immediate payments of $400, this option is incorrect.
B) variable annuity.
A variable annuity allows for investment in various assets and offers payouts that can fluctuate based on the performance of those investments. Since the annuity in question provides a fixed payment of $400 per month, this option is not applicable.
C) single-premium immediate annuity.
This option is correct as it describes an annuity that is purchased with a single lump-sum payment (the bonus check) and begins to make immediate payments. The structure of the annuity fits the criteria, making it the right choice.
D) flexible premium deferred annuity.
A flexible premium deferred annuity allows for multiple contributions over time and delays payouts until a specified date. Since the employee's annuity starts paying immediately and was purchased with a single premium, this option is incorrect.
Conclusion
The correct answer, a single-premium immediate annuity, directly reflects the structure of the employee's purchase and payout schedule. All other options fail to meet the criteria set by the scenario, as they either involve delays in payment or different funding structures. Thus, option C is the only accurate description of the annuity in question.