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An annuity is a life insurance company contract that pays periodic income benefits for a specific period of time or over the course of the annuitants lifetime. These payments can be made annually, quarterly or monthly.
From a life insurers viewpoint, an annuity presents the opposite of mortality risk from a life insurance policy. Life insurance pays a benefit when the policyholder dies. An annuity pays benefits as long as the annuitant lives. With both products, the insurer’s profit or loss depends on whether it made correct assumptions about the policyholder’s life expectancy and the company’s future investment returns.