What is an annuity?

An annuity is fundamentally a financial product used primarily for retirement planning that involves a contract typically issued by an insurance company. Through this contract, an individual makes a lump sum payment or a series of payments in exchange for periodic disbursements in the future. These payments can be structured in various ways, according to the needs of the annuitant, such as receiving a fixed income over a set number of years or for the remainder of their life.

While other options might sound plausible in a very general sense, the definition of an annuity aligns most closely with the characteristics of insurance payouts because it deals with the management of funds for future distribution, often providing financial security during retirement. With this understanding, it is clear that the essence of an annuity lies in its arrangement for future payouts based on the terms of the insurance contract.