38. What type of annuity is purchased with a lump sum and begins making payments within one year?
Answer: B
Single premium immediate annuity (SPIA)
A single premium immediate annuity (SPIA) is purchased with a lump sum and starts making payments within one year. This type of annuity provides an immediate stream of income to the annuitant shortly after the initial investment.
A) Flexible premium deferred annuity
A flexible premium deferred annuity does not begin making payments immediately. Instead, it allows for multiple premium payments over time and starts disbursing funds at a future date, which does not align with the requirement of payments beginning within one year.
B) Single premium immediate annuity (SPIA)
The single premium immediate annuity (SPIA) is the correct choice as it is specifically designed to accept a lump sum payment and commence payments to the annuitant within one year of the purchase. This characteristic directly meets the criteria outlined in the question.
C) Deferred annuity
A deferred annuity is designed to accumulate funds over time and does not start making payments until a specified future date. Since the question specifies payments must begin within one year, this option is not applicable.
D) Installment refund annuity
An installment refund annuity typically provides payments over time and may include a refund of the remaining balance upon the annuitant's death. However, it does not specifically indicate that payments commence immediately after a lump sum payment, thus making it an incorrect answer for the question posed.
Conclusion
The single premium immediate annuity (SPIA) is definitively the correct answer, as it meets the criteria of being purchased with a lump sum and starting payments within a year. All other options either delay payments or do not align with the immediate payment requirements, solidifying SPIA as the only valid choice.