Final answer:
An immediate annuity contract provides for the liquidation of a principal sum to ensure a steady income stream for retirees. It is designed as a financial safety net for old age, paying out a fixed amount regularly, similar to defined benefits pension plans.
Step-by-step explanation:
An immediate annuity contract provides for the liquidation of a principal sum. An annuity is a financial product that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. The payments from an immediate annuity start within a very short period after the initial investment, typically within a year, and are designed to provide a steady income stream to retirees.
Unlike cash-value life insurance, which has a death benefit and accumulates a cash value over time that can be used by the policyowner, an immediate annuity focuses on providing a guaranteed income, usually for retirement. This is akin to pension plans or defined benefits plans, which are fixed annual payments funded by a firm or the individual's savings specifically for retirement income. An immediate annuity contract is a financial safety net that ensures a retiree has a predictable and steady source of income even when other forms of retirement savings may be subject to the volatility of the market or low interest rates.