39. 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.
A single-premium immediate annuity is a financial product where an individual makes a lump-sum payment (in this case, the bonus money) in exchange for guaranteed monthly payments that begin immediately. In this scenario, the employee will receive $400 a month right after purchasing the annuity.
A) deferred annuity.
A deferred annuity is a type of annuity that allows the investment to grow tax-deferred until withdrawals begin in the future. Since the employee's annuity payments start immediately, it does not qualify as a deferred annuity.
B) variable annuity.
A variable annuity is an investment vehicle that allows for varying payments based on the performance of underlying investments. The payments in this situation are fixed at $400 monthly, indicating that this is not a variable annuity.
C) single-premium immediate annuity.
This option is correct as it accurately describes the nature of the annuity purchased. The employee made a one-time payment and began receiving immediate monthly payments, which defines a single-premium immediate annuity.
D) flexible premium deferred annuity.
A flexible premium deferred annuity allows the investor to make multiple contributions over time and receive payments at a later date. Since the employee's payments are immediate and based on a single premium, this option does not apply.
Conclusion
The correct answer is a single-premium immediate annuity because it directly aligns with the employee's situation of receiving immediate monthly payments after making a lump-sum investment. All other options fail to accurately describe the characteristics of the annuity in question, either due to the timing of payments or the structure of the investment.