Definition
An insurance contract that converts a lump sum into a stream of payments, often guaranteed for life. Simple immediate annuities buy predictable income; complex variable and indexed versions layer fees and surrender charges that deserve heavy scrutiny.
Why it matters
The one problem an annuity genuinely solves is outliving your money: no index fund can promise a check for life. The catch is that the same word covers both that simple guarantee and some of the most fee-laden products sold to retirees, so the burden of proof is always on the specific contract.
Example
A 67-year-old hands an insurer $200,000 for a single premium immediate annuity paying roughly $1,250 a month for life. If they live to 97, the guarantee outperformed; if not, the trade-off was income certainty over an inheritance.
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.