An annuity is a contract with an insurance company: you pay a premium (either as a lump sum or a series of contributions), and in exchange, the insurer guarantees a stream of periodic payments for a set term or for life. Annuities are frequently sold, but rarely bought; they are heavily pushed by commission-hungry brokers, meaning you must approach them with extreme skepticism.
For high-net-worth investors, commercial annuities are rarely the primary driver of wealth. An investment portfolio of low-cost equity index funds and municipal bonds offers far higher growth potential, lower fees, and total liquidity. However, annuities can serve as a behavioral tool to build a guaranteed cash flow floor, transferring longevity risk to the insurer.
If you are a high-income Californian facing a combined marginal tax rate near 50%, deferred variable annuities can act as a tax-deferral wrapper. Your assets grow tax-deferred, though you surrender capital control and the eventual distributions will be taxed as ordinary income rather than capital gains.