What is an annuity?


Quick Answer

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.

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Full Answer

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.

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