Annuities have been around for centuries. In early Roman times, citizens would make a one-time payment to a contract known as an annua in exchange for income payments received once a year for the rest of their lives. Today an annuity is an insurance agreement that comes in a number of different forms and can (1) help individuals accumulate money for retirement through tax-deferred savings, (2) provide them with monthly income that can be guaranteed to last for as long as they live, or (3) do both.

An annuity is often viewed as life insurance in reverse. Whereas life insurance protects an individual against premature death, an annuity protects an individual who lives a long life from running out of money. Similar to life insurance, annuity contracts are based on the principle of risk pooling. The burden of not knowing how long one will live is shifted from the individual to the insurance company, which spreads the longevity risk among all annuitants, some of whom will die sooner than expected while others will live longer than expected.