An annuity is a financial product that provides a steady stream of payments to an individual over a specified period of time, typically for the rest of their life. This product is often used as a means of securing a stable income during retirement. An annuity is typically purchased from an insurance company with either a lump-sum payment or a series of payments. In return, the insurer agrees to make periodic payments to the individual, beginning either immediately or at some point in the future.
There are various types of annuities, including fixed annuities, which offer guaranteed payments, and variable annuities, where payments can fluctuate based on the performance of the investment options chosen. Annuities can also be deferred, meaning payments commence at a future date, or immediate, where payments start shortly after the initial investment. The specifics of how an annuity works, including the timing and amount of payments, are determined at the time of purchase. Annuities are often used for their tax-deferred growth potential and for the ability to provide a beneficiary with a death benefit if the annuitant passes away before fully receiving the annuity’s value.