Simply put, an annuity is a contract between you and an insurance company. You deposit money - either all at once or on a perodic basis - and the money is allowed to compound without being affected by current taxes. In return for your investment, the insurance company provides you with tax deferral, the choices of guaranteed rates of return or mutual fund-like sub-accounts, probate protection, and the choice to make a lump sum withdrawl or receive a stream of annual payments. You can even choose income for life!