What is an annuity?

• A. A contract that guarantees a return of premiums at death
• B. A contract that provides income for a specified period of years or for life
• C. A contract that pays a fixed amount for life only
• D. A contract that accumulates funds tax-free

Answer: (B)

An annuity is a contract with an insurer that converts funds you pay into a guaranteed stream of income. The key point is that you receive payments for a defined period of years or for life, rather than a one-time benefit. You can fund it with a single premium or multiple payments, and you can choose when to start the payouts (immediate or deferred). Payouts can be fixed or variable, but the essential purpose is to provide a steady income stream in retirement.

This differs from plans that promise a return of premiums at death, which would be a feature more typical of life insurance or endowment-style products. It also differs from the idea of tax-free accumulation; money in an annuity grows tax-deferred, and taxes are typically due when you receive distributions. The core concept is the income-for-life-or-for-a-period provision, which is what defines an annuity.