An annuity is a tax-deferred investment with an insurance contract that you buy with a lump sum or series of payments. In exchange, the insurance company provides you with guaranteed future income—generally supplied in monthly installments. 

The promise of regular income is attractive to many investors who are looking for that type of security in retirement. Annuities also offer tax-deferred growth for retirement savings, but, unlike IRAs and 401(k)s, they do not have a cap when it comes to annual contributions. Therefore, if you invest in an annuity, you can set aside tax-deferred dollars for retirement over and above what you have already invested in your IRA or 401(k) for any given year. In some cases, annuities also offer a death benefit—usually equaling the amount you have paid into the investment—that provides a guaranteed minimum amount of income to a beneficiary.

There are two basic types of annuities—fixed and variable. With a fixed annuity, the insurance company agrees to pay you a minimum rate of interest while you continue to pay into your account. The insurance company also guarantees periodic payments of a certain dollar amount for a definite time frame or an indefinite period spanning your lifetime or your spouse's. A variable annuity allows you to buy into mutual funds and other investments with your purchase payments. With a variable annuity, the rate of return on your purchase payments as well as the payments you receive from your insurance company will vary based on the performance of your investments.

Before deciding to invest in an annuity, it is a good idea to do some research—other investments may have lower fees, offer more liquidity, and be a better fit for your needs. The U.S. Securities and Exchange Commission provides some useful information on its Web site at http://www.sec.gov/answers/annuity.htm and in its publication called “Variable Annuities: What You Should Know” that can help you evaluate if an annuity is the right investment for you.