Q16RQ - Horngren'S Financial And Managerial Accounting

Question

Question: What is an annuity? How does it differ from a lump sum payment?

Step-by-Step Solution

Answer

Answer

An annuity is an equal monetary payment, while a lump sum payment is a one-time payment.

Step 1: Meaning of an Annuity

An annuity can be a contract between an individual and a life insurance company intended to provide a consistent income for the remainder of life after retirement.

Step 2: Difference between an annuity and a lump sum payment

An annuity payment frequently comprises numerous installments over time, such as one month to month, quarterly or yearly plans. A lump-sum payment permits one to get all of the funds at once. 

On the other hand, an annuity permits one to frequently collect a portion of the cash over a pre-specified time outline, while in a lump sum, a situation may arise when you run out of money.