An investment contract between an owner and a life insurance company; designed to pay out a stream of income, often beginning at a later time.
Deferred annuities can serve as containers which hold “sub-accounts”, which are nearly identical to mutual funds. Variable annuities tend to be more expensive than mutual funds, however, due to the involvement of the third party: the life insurance company. Like a mutual fund, a sub-account carries an expense ratio and turnover costs, but in addition, an annuity normally is subject to surrender charges and mortality and expense charges. This makes deferred annuities generally an expensive, illiquid investment. The problem of excessive costs and illiquidity can be solved through the use of a fee-only annuity.