What is an annuity?

What is an annuity?

• A. A series of equal annual payments
• B. A lump sum payment
• C. A single annual payment
• D. A payment that increases each year

Answer: (A)

An annuity is defined by a sequence of equal payments made at regular intervals. The key idea is that each payment is the same amount and occurs consistently over time, such as a fixed amount paid every year for a set number of years (or, in some cases, for life). This regular, equal-payment stream is what distinguishes an annuity from other payment ideas. A lump sum is a single payment made once, which is different from an annuity. A single annual payment is also just one payment, not a series. If payments were to increase each year, that would be a growing or escalating annuity, not the standard annuity described here.

An annuity is defined by a sequence of equal payments made at regular intervals. The key idea is that each payment is the same amount and occurs consistently over time, such as a fixed amount paid every year for a set number of years (or, in some cases, for life). This regular, equal-payment stream is what distinguishes an annuity from other payment ideas.

A lump sum is a single payment made once, which is different from an annuity. A single annual payment is also just one payment, not a series. If payments were to increase each year, that would be a growing or escalating annuity, not the standard annuity described here.