An annuity refers to a contract between an owner and an insurance company, where the owner deposits money into an insurance contract, and the insurance company, in return, provides an income stream. An annuity contract may be fixed or variable, immediate or deferred. Factors to consider when selecting the contract type include market risk tolerance, the timeframe for when income is needed, guarantees offered within the contract, contract fees, provisions that hedge for inflation risk, contract liquidity, and the claims-paying ability of the issuing insurance company.

While annuities come in many varieties, they share these common benefits: Tax-deferred accumulation of assets for retirement and retirement income stream that may be guaranteed for life. Interest rates, income payouts, and guarantees are backed by the claims-paying ability of the issuing insurance company. In addition, variable investment options are subject to the volatility of market risk.

Annuity contracts play a crucial role in retirement planning through tax-deferred investing and retirement income solutions. Product types vary greatly in features and structure and can meet a variety of financial needs: Tax-deferred growth, insurance against outliving your income in retirement, market participation, funding life insurance premiums, creating your own pension, and charitable gift annuities.