An annuity is a contract with an insurer designed to provide a stream of income, often for retirement. In a sense it's the opposite of life insurance: life insurance protects against dying too soon, while an annuity protects against living too long and outliving your savings. You pay the insurer (all at once or over time), and later the insurer pays you back in periodic payments.

The two phases

• Accumulation phase — you put money in (a lump sum or a series of payments) and it grows, generally tax-deferred.
• Payout (annuitization) phase — the insurer converts the accumulated value into income payments to you.

Common types

• Fixed annuity — earns a guaranteed minimum rate; predictable and lower risk.
• Variable annuity — value and payments fluctuate based on underlying investment subaccounts; more growth potential, more risk.
• Immediate vs. deferred — immediate annuities begin paying right after purchase; deferred annuities start income at a later date.

A simple example

A worker nearing retirement uses savings to buy a deferred fixed annuity. The money grows tax-deferred during the accumulation phase. Years later, the worker annuitizes, and the insurer sends a steady monthly check—income they can't outlive if they choose a lifetime payout option.

Don't confuse it with…

• An annuity is a living benefit (income while alive); life insurance pays a death benefit to beneficiaries.
• "Annuitant" is the person whose life the payout is measured by—similar to the "insured" role, but for income rather than a death benefit.
• A lifetime payout protects against outliving savings, but options vary (period certain, joint life, etc.), each trading income amount for guarantees.

On the exam

Remember an annuity protects against outliving your money (the opposite risk from life insurance). Know the accumulation vs. payout phases, fixed vs. variable, and immediate vs. deferred. Note that growth is generally tax-deferred until payments are taken.