Think of life insurance and an annuity as mirror images. Life insurance protects your family if you die too soon. An annuity protects you if you live too long and outlive your savings. With an annuity, the insurer promises to pay you income for a set period or for the rest of your life.
An annuity has two phases:
Accumulation period: you pay money in and it grows tax-deferred.
Annuitization (payout) period: the insurer pays the money out. Once you annuitize, you generally cannot put the money back or change your mind.
The three parties:
Owner: buys the contract and controls it (can be a person, a trust or a business).
Annuitant: the person whose life the payments are based on. The annuitant must be a natural person, because payments are measured by a human life.
Beneficiary: receives any remaining value if the annuitant or owner dies before the money is used up.
Because annuity buyers tend to live longer, insurers price annuities with mortality tables that assume longer lives than the tables used for life insurance.