An annuity is an investment vehicle sold primarily by insurance companies. Every annuity has two basic properties: whether the payout is immediate or deferred, and whether the investment type is fixed or variable. An annuity with immediate payout begins payments to the investor immediately, whereas the deferred payout means that the investor will receive payments at a later date. An annuity with a fixed investment type offer a guaranteed return on investment by investing in government bonds and other low-risk securities, whereas a variable investment type means that the return on the annuity investment will depend on performance of the funds (called sub-accounts) where the money is invested. Based on these two properties with two possibilities each, there are four possible combinations, but the ones commonly seen in practice are an annuity with immediate payout and fixed investments (often known as a fixed annuity), and an annuity with deferred payout and variable investments (usually called a variable annuity). This article discusses fixed annuities briefly and variable annuities at some length, and includes a list of sources for additional information about annuities.

The idea of a fixed annuity is that you give a sum of money to an insurance company, and in exchange they promise to pay you a fixed monthly amount for a certain period of time, either a fixed period or for your lifetime (the concept of 'annuitization'). So essentially you are converting a lump sum into an income stream. Whether you choose period-certain or annuitization, the payment does not change, even to account for inflation.

If a fixed-period is chosen (also called a period-certain annuity), the annuity continues to pay until that period is reached, either to the original investor or to the investor's estate or heirs. Alternatively, if the investor chooses to annuitize, then payments continue for a variable period; namely until the investor's death. For an investor who annuitized, the insurance company pays nothing further after the investor's death to the estate or heirs (neither principal nor monthly payments), no matter how many (or how few) monthly payments you received.

Fixed annuities allow you some access to your investment; for example, you can choose to withdraw interest or (depending on the company etc.) up to 10% of the principal annually. An annuity may also have various hardship clauses that allow you to withdraw the investment with no surrender charge in certain situations (read the fine print). When considering a fixed annuity, compare the annuity with a ladder of high-grade bonds that allow you to keep your principal with minimal restrictions on accessing your money.

Annuitization can work well for a long-lived retiree. In fact, a fixed annuity can be thought of as a kind of reverse life insurance policy. Of course a life insurance contract offers protection against premature death, whereas the annuity contract offers protection for someone who fears out-living a lump sum that they have accumulated. So when considering annuities, you might want to remember one of the original needs that annuitities were created to address, namely to offer protection against longevity.

Another situation in which a fixed annuity might have advantages is if you wish to generate monthly income and are extremely worried about someone being able to steal your capital away from you (or steal someone's capital away from them). If this is the case, for whatever reason, then giving the capital to an insurance company for management might be attractive. Of course a decent trust and trustee could probably do as well.