An annuity begins with a sum of money, called principal. Annuity principal is created (or funded) in one of two ways; immediately with a single premium or over time with a series of flexible premiums.
Single Premium: A single premium annuity is basically just what the name implies; an annuity that is funded with a single, lump-sum premium, in which case the principal is created immediately. Usually, this lump sum is fairly large.
Periodic (Flexible) Payments: But not everyone has a large lump sum with which to purchase an annuity. Annuities can be funded through a series of periodic premiums that, over time, will amass an amount large enough to buy a significant annuity benefit. At one time, it was common for insurers to require that periodic annuity premiums be fixed and level, much like insurance premiums. Today, it is more common to allow contract owner’s flexibility as to allowing premiums of any size (within certain minimums and maximums, such as none less than $25 or more than $1,000,000) and at virtually any frequency.