Annuities are insurance contracts bought by a person, known as the contract owner, that will pay the annuitant, the person who will receive the annuity, a periodic amount starting at a given date and continuing the rest of the annuitant's life. Usually, but not necessarily, the contract owner and the annuitant are the same person. Although most annuities are for retirement, the payouts can start at any time. The period of time that money is paid into an account is known as the accumulation period; the time that the annuitant receives the money is known as the annuity period. When the annuity period begins and the account starts paying the annuitant, then the account is said to be annuitized. The periodic payment is determined primarily by how much is in the account, how much it earns during the annuitant's life, and how long the annuitant is expected to live.

The earnings in the account are tax-deferred; no taxes are due on earnings during the accumulation phase, but during the annuity period, earnings, but not principal, are taxed as ordinary income. The principal is not taxed because the premium is paid with after-tax shillings.

There are different types of annuities that can be classified according to the variability of the periodic payment: fixed, variable, and combination.

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