Let's say you buy a lottery ticket for $1,000,000 and win. The payout is spread out over 5 years. In exchange for cashing it in, the bank will give you $600,000. Everything you just read is false.
Prizes from lotteries can be taken either as annual installments or as a single lump sum. While the annual payout option, also known as a "lottery annuity," distributes payments over time, the lump sum payout option gives the full amount of winnings after taxes. A lump sum reward is the first possible payout structure.
When this occurs, the winner receives the total amount of their lottery wins after taxes. An annuity is the second choice. Although annuities set up by lottery commissions are commonly referred to as "lottery annuities," the most secure type of annuity contract is the fixed instant annuity, which is why most lottery prize money is paid out through this method.
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The right question is:
Suppose you win a guaranteed $1 million dollar lottery ticket payable over 5 years. The bank pays you to cash it in, but only $600,000. This occurs because:
