How exactly does an annuity work? An annuity is actually a type of insurance, though it acts somewhat like an investment. But, it’s more stable than most investments. Why? Once you go into a contract with your annuity provider, they have to pay you the agreed-upon amount. So, it’s a guaranteed income.

The insurance provider takes on the risk of you outliving your savings—i.e., outliving the amount grown by your investment over time, and having to pay you your guaranteed income themselves. When you first purchase your policy, you enter the “accumulation” phase, a period of time where you make your monthly payments without receiving the income. Depending on your policy, this phase can be anywhere from 10-30 years.

Once that time has passed, you enter the annuitization or distribution phase. This is when you start consistently receiving that guaranteed income in the form of monthly payments on behalf of your policy and the insurance provider to you.