What is the definition of an annuity?

An annuity is best defined as a financial vehicle for liquidating a sum of money. This means that an annuity is designed to convert a lump sum of money into a series of regular payments, typically over a specified period. This structure allows individuals to receive a steady income stream, which can be particularly beneficial for retirement planning, ensuring financial stability during one's later years.

Annuities can be set up in various ways—some may start paying out immediately, while others may accumulate value for a period before disbursing payments. They are often used to help manage longevity risk, which is the risk of outliving one’s savings, by providing a reliable source of income.

The other choices do not directly define what an annuity is. Life insurance focuses on providing financial protection in the event of the insured's death, trust funds are more about managing and distributing assets according to specific wishes, and tax-advantaged investment strategies include various financial products designed to reduce tax liabilities but do not specifically define the characteristics or purpose of an annuity.