What is the main purpose of an annuity?

The main purpose of an annuity is to guarantee future payments, typically used as a source of income during retirement. Annuities are financial products that allow individuals to make a lump-sum payment or a series of payments to an insurance company, which then makes periodic payments back to the individual at a later date. This structure is particularly valuable for ensuring a steady income stream, which can help retirees manage their expenses over time without the risk of outliving their savings.

By providing a predetermined income, annuities help address longevity risk—the danger of outliving one’s financial resources. This benefit becomes crucial during retirement when individuals may no longer have a consistent paycheck and need reliable income to cover living expenses. Annuities can also offer various payment options, including lifetime payments, which further enhance their appeal as a retirement income solution.

In contrast, the other options either do not align with the fundamental purpose of an annuity or pertain to other financial products. Life insurance primarily focuses on providing financial protection to beneficiaries upon the policyholder's death, while business investment capital refers to funding for operational purposes which is not the role of an annuity. Likewise, high-risk investments are generally associated with wealth accumulation rather than the income guarantee characteristic of annuities