What is an annuity?

An annuity is a financial product that provides a series of regular payments to an individual over a defined period of time. Typically, an annuity is purchased by an individual from an insurance company or financial institution with a lump sum of money or through a series of payments. In exchange for this payment, the insurance company guarantees a fixed or variable stream of payments to the individual, either for a specified period of time or for the remainder of their lifetime.

Annuities can be classified in several ways, such as fixed or variable annuities, immediate or deferred annuities, and single or joint-life annuities. Fixed annuities offer a fixed interest rate, whereas variable annuities allow the investor to choose from a range of investment options. Immediate annuities begin payments immediately after the initial payment, while deferred annuities start payments at a later date. Single-life annuities offer payments for the lifetime of the individual, while joint-life annuities offer payments for the lifetime of both the individual and their spouse.

Annuities can be used for retirement planning, as a source of regular income, or as a means of transferring risk from the individual to the insurance company. However, annuities can also have high fees and surrender charges, which can impact the overall return on investment. Therefore, it is important to carefully consider the terms and fees of an annuity before purchasing one.