Annuity

An annuity is a financial contract whereby one party pays another a certain amount up front, in exchange for a series of periodic payments at a later time. The payments either end on a specific date or passage of a specific event.

Annuities are most commonly used in retirement, whereby a retiree pays a lump-sum amount in exchange for monthly payments to last until the retiree (or, also common, both the retiree and his/her spouse) pass away. This is the most traditional type of retirement annuity, which has risks to both parties: if the retiree dies soon after the payment the unused amount is forfeited to the company paying the annuity, but if the retiree lives longer than expected (per tables prepared by actuaries) the company paying the annuity loses money. Other variants are annuities for a specified period (if the retiree dies before then, his/her heirs are paid the rest) or an annuity with cash refund options (any unused amount is paid to the heirs).