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 provides regular payments to the annuitant immediately after a lump sum payment is made. In this case, the employee uses her bonus to purchase such an annuity, which begins paying her $400 a month right away.
A) deferred annuity.
A deferred annuity does not begin payments immediately; instead, it accumulates value over time before making payments at a later date. Since the employee's annuity starts paying out immediately, this option is incorrect.
B) variable annuity.
A variable annuity allows the annuitant to invest in various investment options, with payments fluctuating based on the performance of those investments. The employee's annuity, which guarantees a fixed monthly payment of $400, does not fall under this classification, making this option incorrect.
C) single-premium immediate annuity.
This option is correct as it accurately describes the financial product purchased by the employee. She made a single lump-sum payment with her bonus to acquire an annuity that starts making immediate monthly payments.
D) flexible premium deferred annuity.
A flexible premium deferred annuity allows for multiple payments to be made over time and does not begin payouts immediately. Since the employee's annuity starts providing payments right away, this option is also incorrect.
Conclusion
The correct answer, single-premium immediate annuity, precisely defines the financial product the employee purchased, as it entails a one-time payment leading to immediate payouts. All other options either mischaracterize the timing of payments or the nature of the annuity, thereby confirming that they are not applicable in this context.