An annuity is a contract between an investor and an insurance company. The investor makes a payment or series of payments to the insurer. In return, the insurance company makes guaranteed, scheduled payments back to the investor at a specified interest growth rate.

A basic life annuity, in return for a lump payment or series of contributions over a set period of time, guarantees a steady income for life. Along with this most basic type, there are many other variations.

Life annuities are usually used to help budget money after retirement. Typically, the investor pays into the annuity on a periodic basis when he or she is still working. Others may buy the annuity product with one lump sum. Upon retirement, a specific date, the annuity makes set, periodic payments to the annuitant, providing a reliable source of income. When a death occurs, the periodic payments from the annuity usually stop, unless a specific arrangement has been made. Some life annuities provide a benefit for both spouses and payments will continue until both are deceased.

Most investors in a life annuity choose to receive monthly payments. Investors who choose monthly distribution and live a long retirement life, the total value received will usually be significantly more than what was paid into it. If the investor dies relatively early into the annuity payments, they may have paid much more than they received. This is the risk associated with life annuities. Regardless of how long an investor lives, they are buying the security of guaranteed income for the remainder of their life.

Annuities also offer deferred-tax status - contributions reduce taxable earnings for the current year, and the investment earnings grow tax-free until used as income. This tax-benefit feature is useful for young investors who can contribute to a deferred annuity for many years and take advantage of tax-free compounding in their investments.

The tax-deferred status of annuities also benefits very wealthy investors or above-average income earners. These investors often utilize annuities to transfer large sums of money or to lower their annual income base.

Life annuities can be purchased with funds from a variety of possible sources, including: funds from a tax-qualified defined benefit, 401(k) or IRA account; funds from a mature bank CD; or funds accumulated in a deferred annuity account.

Because they are long-term retirement planning vehicles, most annuities have provisions that penalize investors for early withdrawal. Tax rules also encourage investors to prolong withdrawing annuity funds until a minimum age Most annuities, however, usually allow 10-15% of the account to be withdrawn for emergency purposes without penalty.

A basic life annuity provides the maximum amount of monthly income because the annuity ends with the passing of the investor.

This annuity provides monthly income for a guaranteed period and thereafter for the remaining lifetime. The period elected may be 5, 10, 15, or 20 years. If the investor dies before the end of the guaranteed period, the insurance company will pay the remaining payments to a beneficiary or an estate.

This annuity provides a monthly income for a guaranteed period and thereafter for the remaining life. If the investor should die before the total of annuity payments equals the annuity's purchase price, the insurance company will pay the difference to a beneficiary or an estate.

This annuity option provides the investor and another person with a monthly income while both living. Upon the death of either investor, the payments continue for the lifetime of the survivor. The surviving person's income is a percentage of the full amount chosen: 50%, 66%, 75%, and 100% may be options. Payments end immediately upon the death of the survivor without regardless of the number or total of the payments received.

This annuity is very similar to the Joint and Survivor Annuity except the proceeds provide equal monthly payments for the guaranteed period and so long thereafter for as long as the investor or the survivor remains living.