What is an Annuity?

An annuity is a financial product that involves an insurance-based contract designed to provide a stream of future payments. This can be particularly beneficial for individuals looking for a steady income during retirement, as annuities can be structured to pay out regularly over a specified period or for the lifetime of the annuitant.

These contracts are often funded through a lump-sum payment or a series of payments made over time. In return, the insurer guarantees a series of payments, which can be fixed, variable, or indexed depending on the type of annuity chosen.

In contrast, the other options describe different financial instruments. A savings account pays a fixed or variable interest rate and is not structured for future payments like an annuity. An investment option that allows stock market participation refers to investments like stocks or mutual funds, which do not guarantee a steady income. Lastly, a mutual fund is a pooled investment vehicle whose value can fluctuate based on the performance of underlying assets, diverging from the guaranteed payment structure that an annuity offers. Thus, understanding these distinctions highlights why the description of an annuity as an insurance-based contract for future payments is accurate.