An annuity is a contract under which one party, an insurance company, agrees to pay a second party, an annuitant, a stated income for life, or some other predetermined period. The purchase price of the annuity can be paid to the insurance company in a single sum, or in a series of payments over time.

Unlike life insurance, which can create a capital sum in return for as little as one premium payment, annuities are designed both to accumulate capital over a period of time and distribute capital over an individual's lifetime. Thus, annuities have two distinct phases:

• Accumulation Phase: When income payments to the annuitant are deferred to a future date, the single sum or periodic premiums paid by the annuitant are invested by the insurance company and grow in value, based on the type of annuity selected.
• Distribution Phase: The period of time over which the value of the annuity is paid out to the annuitant. Distribution options can range from a lump-sum payment to a lifetime income, depending on the annuity type and option selected by the annuitant. Other financial products can be used to accumulate and distribute capital, but they cannot offer the distinct advantages of annuities. In fact, several reasons account for the renewed and increasing popularity of annuities.