An annuity is a contract between you and an insurance company in which you make a lump sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future.
Annuities are insurance contracts that promise to pay you regular income either immediately or in the future.
You can buy an annuity with a lump sum or a series of payments.
The income you receive from an annuity is taxed at regular income tax rates, not capital gains rates, which are usually lower.
The goal of annuity is to provide a steady stream of income, typically during retirement. Funds accrue on a tax-deferred basis, and like 401(k) contributions, can only be withdrawn without penalty after age 59½.
Many aspects of an annuity can be tailored to the specific needs of the buyer. In addition to choosing between a lump sum payment or a series of payments to the insurer, you can choose when you want to annuitize your contributions—that is, start receiving payments. An annuity that begins paying out immediately is referred to as an immediate annuity, while one that starts at a predetermined date in the future is called a deferred annuity.
The duration of the disbursements can also vary. You can choose to receive payments for a specific period of time, such as 25 years, or for the rest of your life. Of course, securing a lifetime of payments can lower the amount of each check, but it helps ensure that you don't outlive your assets, which is one of the main selling points of annuities.