What is an annuity?

An annuity is a contract with an insurance company that provides periodic payments to the annuitant. Where life insurance addresses the risk of premature death (paying when the insured dies too soon), an annuity addresses the risk of outliving one's resources (paying as long as the annuitant lives). Two phases: (1) Accumulation phase — premiums paid in, value grows tax-deferred; (2) Payout (annuitization) phase — periodic income payments to the annuitant. Types: immediate (payments begin right after a single premium) versus deferred (accumulation period before payouts begin); fixed (guaranteed rates of growth and payment) versus variable (returns depend on investment subaccount performance) versus indexed (linked to a market index with floors and caps).