Annuity

An annuity is a contract between an individual and an insurance company in which the individual makes a lump sum payment or a series of payments, and in return, the insurer provides regular disbursements, starting either immediately or at some point in the future. Annuities are primarily used as a tool for retirement planning, providing a steady income stream to retirees.

There are different types of annuities, including fixed annuities, which offer guaranteed payments, and variable annuities, where payments fluctuate based on the performance of investments chosen by the annuitant. Indexed annuities provide returns based on the performance of a market index. Annuities can be immediate, starting payments right away, or deferred, beginning payments at a future date. The primary advantage of annuities is the security of a guaranteed income for life or a specified period, though they often come with fees and surrender charges.

1. A retiree purchasing a fixed annuity to receive guaranteed monthly payments for life.
2. An individual investing in a variable annuity with payments based on the performance of a chosen investment portfolio.
3. A person choosing a deferred annuity to begin receiving income payments 10 years after the initial investment.