What is an Annuity? - WREX.com – Rockford’s News Leader

What is an Annuity?

People approaching retirement age sometimes want to provide a guaranteed source of income for the rest of their lives. If they don't have enough money to do this immediately, they make plans to save and grow the money gradually. Since they are close to retirement, they have little chance to make up for investment losses by earning more money, which is another reason not to take much investment risk.

The money they save and invest must last the rest of their lives, but they don't know how long they will live. Insurance companies must take in money and invest it to get money to pay life insurance benefits. They are experts at estimating average life spans of, and pay benefits to, people who want income that will last for the rest of their lives.

Originally, the lifelong payment stream was called an annuity. Now the term annuity is applied to the contract between individual and insurance company. Inside the contract, the company spells out the terms in which it will fulfill its promise of guaranteed lifelong income to the annuity holder.