Definition
An annuity is a financial contract between an individual and an insurance company in which the insurer provides a series of regular payments in exchange for a lump-sum premium or a series of contributions.
How it works
The policyholder pays a premium to the insurer, who invests the funds and later distributes payments over a defined period or for the lifetime of the annuitant.
In the Longevity Standard Framework
Annuities are the primary instrument for converting accumulated retirement savings into guaranteed lifetime income, directly addressing longevity risk.
Related terms
Premium, Annuitization, Deferred Annuity, Immediate Annuity, Longevity Risk.
In practice
An individual approaching retirement may purchase an annuity to ensure a predictable monthly income stream regardless of how long they live.