Annuities are a type of insurance, more specifically a type of life insurance. Annuities are based on a contract between an insurance company and a client (and they work in a very similar way to the private pensions). A typical contract consists of two distinct phases: a certain amount of time when the customer deposits/pays money into the account (usually known as an accumulation phase), and then a period of time when the insurance company pays the customer the money back (known as the pay-out phase). The moment when the switch is made from paying to getting paid coincides usually with the time when the customer retires from active work/service. Annuities work in the following way: the client pays a certain amount of money either all in one go or over a certain amount of time with a certain regularity (once a year, twice a year, once a month, etc) and in exchange the insurance company will pay the money back either all in one lump sum or over a certain amount of time, according to the conditions stipulated in the initial contract. The money paid over a certain amount of time may be paid for a number of years (for instance 25) or for life.

There are two major types of annuities: fixed and variable. In the case of fixed annuities, the customer is guaranteed by the insurance company a minimum rate of interest given for the money paid before the insurance company starts making payments back and that, if s/he has opted for a periodic payment, the insurance company will guarantee a certain amount per dollar in terms of value of the payments made. The fixed type of annuity is very similar with a bank deposit that starts paying good interest after a certain amount of time.

The variable annuities are more similar to investing your money, rather then saving it. If you chose a variable annuity, you may have the option of choosing form among a wide range of investment options, starting from the stock exchange up to real estate; however, the most common type of investment of this type is in mutual funds. According to the success of your investments, the amount of money the customer is paid will vary. The better the investments did, the higher the amount of money received. A special type of variable annuities are the equity-indexed annuities. When the customer buys this type of annuity, the insurance company guarantees a minimum return pay, crediting him or her with a return usually based on an equity index and its changes (a good example of such index would be the S&P 500 Composite Stock Price Index).

It is important to know that variable annuities are regulated by the SEC, because they are considered to be securities. Fixed annuities are not considered securities and thus do not fall under the incidence of SEC.

Annuities hold one more advantage, i.e. they offer are tax-deferred, which means that there is no income tax charged for the payments made towards the variable annuities until you start being paid back by the insurance company. Furthermore, in many cases they include other benefits as well, such as a death benefit, i.e. in the unfortunate event of your death (that occurs before the paying-towards-the-insurance-company-time period is over), your survivors (spouse or other beneficiary stipulated in the initial contract) get a certain amount of money.

Annuities are usually purchased by people considering retirement plans or, alternatively, investment plans.