85. 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 that allows an individual to make a lump sum payment in exchange for a series of payments beginning immediately. In this case, the employee uses her bonus check to purchase this type of annuity, resulting in monthly payments of $400.
A) deferred annuity.
A deferred annuity is a financial product where the payments begin at a future date, after the accumulation phase. Since the employee is receiving payments immediately upon purchasing the annuity, this option is incorrect.
B) variable annuity.
A variable annuity allows the owner to invest premiums into various investment options, with payouts that may vary based on the performance of those investments. The scenario describes fixed monthly payments of $400, indicating that the annuity purchased is not variable in nature, making this option incorrect.
C) single-premium immediate annuity.
This option is correct as it describes an annuity where the purchaser makes a one-time payment (the bonus check) and begins receiving payments right away. The structure of $400 monthly payments aligns perfectly with the definition of a single-premium immediate annuity.
D) flexible premium deferred annuity.
A flexible premium deferred annuity allows for multiple payments over time, with payouts starting at a later date. Since the employee starts receiving payments immediately rather than deferring them, this option does not apply in this scenario and is therefore incorrect.
Conclusion
The single-premium immediate annuity is the only option that accurately describes the situation where the employee uses a lump sum to obtain immediate monthly payments. All other options either misrepresent the timing of the payments or the structure of the annuity, confirming that option C is the definitive answer.