Difficulty: Medium

Average Score: 60%

What type of annuity is purchased with a lump sum and begins making payments within one year?

Rationale

Single premium immediate annuity (SPIA) starts making payments within one year after purchase.

A single premium immediate annuity is specifically designed for individuals who make a one-time lump sum payment and begin receiving regular income payments almost immediately, typically within a year. This type of annuity offers a straightforward and efficient way to convert a lump sum into a steady income stream.

A (Flexible premium deferred annuity) YOUR ANSWER

This type of annuity allows for multiple premium payments over time and defers the income payouts until a later date, usually several years after the initial investment. As such, it does not provide immediate payments within one year, which disqualifies it from being the correct answer.

B (Single premium immediate annuity (SPIA)) CORRECT

)
This option accurately describes an annuity that requires a one-time lump sum payment, initiating payments to the investor almost right away, typically within a year. This feature is what distinguishes it from other types of annuities, making it the correct choice for the question.

C (Deferred annuity) YOUR ANSWER

A deferred annuity involves payments made at a later date, usually after an accumulation phase where the investment grows. Since the payments do not begin immediately and can be delayed for several years, it does not fit the criteria of beginning payments within one year.

D (Installment refund annuity) YOUR ANSWER

An installment refund annuity provides payments back to the annuitant until the total amount invested is paid out. While it can be structured to begin payouts within a year, it is not specifically defined by the lump sum payment initiating immediate income, thereby making it less accurate than the SPIA for this question.

Conclusion

The single premium immediate annuity (SPIA) uniquely fulfills the criteria of being purchased with a lump sum and starting payments within one year, making it the ideal option for individuals seeking immediate income. Other types of annuities either involve multiple payments, defer commencement of payouts, or do not specifically align with the requirements outlined in the question, reinforcing the SPIA’s position as the correct answer.

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