What is the primary function of an annuity?

The primary function of an annuity is to guarantee a life income in case of longevity. Annuities are financial products designed to provide a steady income stream, typically for retirees, over a specified period or for the lifetime of the annuity holder. This feature addresses the concern of outliving one’s savings, ensuring that individuals receive regular payments for as long as they live.

By establishing a mechanism that transforms a lump sum into a consistent cash flow, annuities serve to mitigate risks associated with longevity, allowing individuals to maintain their standard of living in retirement. This characteristic distinguishes annuities from other financial instruments that may have different roles, such as accumulating funds for investments or providing cash surrender values. In this context, the focus is on the assurance of lifelong income, which is central to the purpose of an annuity.