An annuity is a financial arrangement where someone receives regular payments over time, sometimes for the rest of their life.

Here's how it typically works: Someone (often nearing retirement) gives a large sum of money to an insurance company or financial institution. In return, that institution promises to pay them a steady amount on a regular schedule. It's like trading a big pile of money now for a reliable stream of smaller payments later.

Imagine your grandmother worked for 40 years and saved $500,000. She could buy an annuity that pays her $3,000 every month for the rest of her life. This way, she doesn't have to worry about her savings running out, even if she lives to be 100. The insurance company takes the risk of whether she lives a long time or not.

Annuities help people plan for retirement because they provide predictable income, like a paycheck that continues even after you stop working. Some annuities guarantee payments for a specific number of years, while others continue for an entire lifetime. People choose annuities when they want the security of knowing exactly how much money they'll have each month, rather than managing investments themselves.