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
single-premium immediate annuity.
This type of annuity requires a one-time payment, or single premium, to provide immediate income, which aligns with the employee's use of her bonus check to purchase an annuity that pays out $400 monthly starting right away.
A deferred annuity begins payments at a future date rather than immediately. In this scenario, since the annuity starts paying out right after the purchase, it does not fit the definition of a deferred annuity.
A variable annuity allows for payments that can fluctuate based on the performance of underlying investments. The employee's annuity guarantees a fixed monthly payment of $400, indicating that it is not a variable annuity but rather a fixed one.
A flexible premium deferred annuity allows the buyer to make multiple payments over time before the income payouts begin at a later date. Since the employee made a single payment and started receiving payments immediately, this choice is not applicable.
An employee using a bonus to buy an annuity that pays out immediately defines a single-premium immediate annuity, characterized by a one-time investment leading to immediate regular payments. Both deferred and variable options do not apply here, as they either delay payment or involve payment variability, which contradicts the scenario presented.
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