An annuity is a contract with an insurance company that provides a guaranteed stream of income in exchange for a lump sum or a series of payments. It is often used for retirement to ensure a steady income that can last for a set period or for the rest of your life. Annuities offer benefits like tax deferral on earnings, and they can be structured as immediate (payments start soon after purchase) or deferred (payments start later). 

How annuities work

• You pay: You make one or more payments to the insurance company to purchase the annuity.
• The insurer pays: In return, the insurance company agrees to make regular payments back to you, the annuitant, according to the terms of the contract.
• Payment schedule: Payments can be structured to begin immediately or at a future date. They can be for a specific period or for the rest of your life.
• Tax benefits: Earnings within the annuity can grow tax-deferred, meaning you don't pay taxes on them until you withdraw them. 

Types of annuities

• Fixed annuities: These provide a guaranteed minimum interest rate and a fixed payment amount.
• Variable annuities: These allow you to invest in options like mutual funds, so the value and potential payout can fluctuate with market performance.
• Indexed annuities: These link your earnings to a stock market index, like the S&P 500, but with a cap on returns. 

Key considerations

• Long-term commitment: Annuities are typically long-term investments.
• Fees and expenses: They can have commissions and other fees that reduce your earnings.
• Guarantees: Any guarantees are dependent on the financial strength and claims-paying ability of the issuing insurance company.
• Complexity: Different types of annuities have varying levels of complexity, so it's important to understand them thoroughly before buying.