What is a key characteristic of an annuity?

Annuities are financial products designed specifically to provide a stream of income over a specified period or for the lifetime of the annuitant. This characteristic sets them apart from other financial products. This income can be especially beneficial for retirement planning, as it ensures that individuals have a consistent cash flow coming in after they stop working.

While annuities can have certain tax advantages, such as tax-deferred growth until withdrawal, this does not encapsulate the primary purpose of an annuity. The option regarding tax implications does not fully convey the fundamental nature of the product. Similarly, the assertion that annuities are only purchasable through a lump sum is incomplete, as they can also be funded through a series of payments.

Ultimately, the fundamental appeal of an annuity lies in its ability to convert a lump sum of money into a reliable source of income, either for a set time period or specific to the annuitant's lifetime. This characteristic is essential for individuals planning for financial security in retirement.