An annuity is a financial product that provides a reliable income stream, primarily used for retirement planning. It works by converting a lump sum or series of payments into a steady cash flow. Here’s a breakdown of how annuities function:

1. Initial Investment: You start by either making a single lump-sum payment or a series of payments over time to the insurance company.
2. Accumulation Phase: If you opt for deferred payments, your money grows during the accumulation phase. This period involves the initial investment accruing interest, typically at a rate specified in your annuity contract.
3. Distribution Phase: When the agreed-upon time comes, usually after retirement, the annuity enters the distribution phase. Here, the insurance company begins making regular payments to you. These payments can be set for a specific period or for the rest of your life, depending on the type of annuity.
4. Types of Annuities: There are various annuities to choose from:
   • Fixed Annuities: Offer a guaranteed payout, with a fixed interest rate.
   • Variable Annuities: Allow investment in different securities, with payouts depending on investment performance.
   • Indexed Annuities: Tie your returns to a market index, offering a blend of security and growth potential.
5. Benefits: The main benefits of annuities include tax-deferred growth, a predictable income stream in retirement, and options for a death benefit for beneficiaries.