An annuity is a contract between an individual and another party, typically an insurance company, in which the individual pays the second party a lump sum in return for a series of regular payments, explains Investopedia. The purpose of an annuity is to give investors reliable retirement income.
There are three main types of annuities from which an investor can select: fixed, variable and indexed annuities, according to Investopedia. A fixed annuity pays the investor a guaranteed amount based on her account balance. When an individual invests a variable annuity, she selects from a set of mutual funds to compose the specific account. Payments from a variable annuity are dependent upon the performance of those selected mutual funds. An indexed annuity pays the investor a minimum amount, but the total payment is dependent upon the performance of a specific market index.