Which of the following best defines an annuity?

An annuity is best defined as a contract between the purchaser and an insurer. This financial product involves the purchaser making a lump sum payment or a series of payments to an insurance company, in exchange for regular disbursements during a specified period, often during retirement. The primary purpose of an annuity is to provide a steady income stream, which can be a crucial aspect of financial planning.

Annuities are designed to manage the risk of outliving one’s savings, offering a predictable income that can help individuals sustain their living expenses over time. This arrangement differentiates annuities from equity investments, which involve ownership in a company; loan repayment structures, which pertain to the borrowing and repayment of borrowed capital; or methods of real estate investment, which focus on property ownership and management for profit generation. Thus, the correct identification of an annuity as a contract between the purchaser and an insurer accurately captures its essence and function in financial services.