What is an annuity?

An annuity is fundamentally understood as a financial product designed to provide a series of payments over a specified period, often utilized as a means of income during retirement. This structure allows individuals to turn a lump sum of money, usually accumulated through savings or investment, into a steady stream of income.

The essence of an annuity lies in its ability to create a predictable cash flow, which can be particularly beneficial for budgeting and managing expenses during retirement years. Annuities may be structured in various ways, including immediate or deferred payments, further enhancing their adaptability to individual financial needs.

Other options, while they touch on financial concepts, do not encapsulate the core definition of an annuity. For example, a savings account with high interest is focused on liquid savings rather than structured income payments. A loan from a financial institution represents a borrowing arrangement rather than an investment product meant for income delivery. Similarly, an insurance policy that pays a lump sum addresses risk management rather than the systematic provision of payments over time. Therefore, the defining characteristic of an annuity remains its function as a scheduled payment arrangement, distinguishing it clearly from these other financial instruments.