An annuity is a contract between an individual and an insurance company in which the individual deposits money either as a lump sum or various amounts over time to be withdraw latter, usually in equal installments at retirement age.
a) Fixed annuity – the insurance company provides a guaranteed rate for a period of time. However, the annuitant is exposed to the same risk as with any long-term investment : the insurance company can offer whatever the current rate proves to be and that can be either lower or higher.
You could also purchase a fixed death benefit which in effect makes it partly life insurance.
b) Variable annuities – It is more like mutual funds. The insurance company takes your money and invest it in separate accounts. These accounts can be stock, bonds, real estate or fixed yield portfolio. These accounts can perform well or poorly over time. Some point, an individual will begin to take payouts from the insurance company.
These could be in the from of lump sum withdrawal or equal withdrawals for a person’s lifetime or for a fixed period of time with a guarantee of a minimum amount of time.
Other annuities are deferred annuities where you either contribute periodically to the contract or pay a lump sum with the withdrawal starting at a much later date. Most types of retirement plans are of this order.
Source :- Personal Finance in Today’s Complex World – Thomas Fredericks