An annuity is really a very unique product. An annuity is a contract with an insurance company, but it is not an insurance policy. It is a savings vehicle that offers tax-deferred accumulation of earnings, and may offer other features such as a minimum rate of return guarantee or a guarantee of principal if you die. In its simplest form, you pay money to an annuity issuer, allocate your money to either fixed or variable investment options, and then the issuer pays out the principal and earnings back to you or to a named beneficiary. There may be some guaranteed or "insurance" components to an annuity as well. For example, fixed annuities usually guarantee that you will earn a minimum interest rate during the accumulation phase, and that your premium payments will be returned to you. With a variable annuity you may receive a guarantee that your beneficiary will receive at least the amount of your original principal if you were to die, even if the value of the annuity is less. And regardless of whether you purchase a fixed or variable annuity, you are guaranteed to receive payments for life if you elect to annuitize.Annuities can be an excellent tool if you use them properly, but they are not right for everyone. It is important to understand both the advantages and the disadvantages of using annuities in various situations.Retirement planningSaving for retirement is the most common use of annuities. Tax deferral benefits will allow your dollars to grow faster than a comparable taxable investment. An annuity can be an excellent tool for this purpose. Here are some reasons why you might want to consider an annuity for retirement savings:The earnings are tax-deferred.Annuitized payouts if chosen, continue until death.If you work for a small company or are self-employed, you may not have access to a qualified plan. Annuities may be a way for you to supplement your Social Security income during retirement.IRAs place a limit on contribution amounts. Annuities do not have a limit on the amount of funds that you can invest in the annuity.IRAs require the holder to begin receiving minimum distributions at age 70.5. Annuities do not have minimum distribution requirements.Annuities have certain disadvantages, as well. It is important to note that payments into an annuity aren't tax deductible. For this reason, most experts recommend maxing out your contributions to other available retirement plans before you think about an annuity. Additionally, annuity withdrawals made prior to age 59 1/2 are typically subject to a 10 percent early withdrawal penalty. If you plan to retire early, or if you think you might need to access your money before age 59 1/2, you should probably explore other options.Business planningIf you are self-employed or own your own business, you may want to consider an annuity to supplement your own retirement. As you probably won't be able to take advantage of a generous pension plan, an annuity can be used to fill in the gaps after you have made the maximum allowable contributions to other available retirement plans. Again, if you plan to retire early you'll have to watch out for the 10 percent early withdrawal penalty.