Money has value in the present and in the future. Therefore the term, time value of money, has particular relevance because money is something we need both today and tomorrow. The time value of money has been defined as the value of money figuring in a given amount of interest earned over a given amount of time.
Notice the similarities between this definition and the workings of an annuity. What a person actually receives when purchasing an annuity is a guarantee (from most annuities) that their money will be invested at interest earning them an amount that will be higher over a period of time. The eventuality hoped for is the future pot of money will be a large pot.
Using the typical example of 100 dollars of today's money invested for one year and earning 5 percent interest, we find that the 100 dollars will be worth 105 dollars after one year ($100 X 5% $100 = $105.00). Therefore, using time value of money terminology, 100 dollars invested for one year at 5 percent interest has a future value of 105 dollars.
The idea behind putting money on deposit in an annuity is to have it grow tax deferred while at the same time compounding on an annual basis. The financial mechanism called tax deferral adds to the value of the money on deposit as the interest isn't taxed as it grows like a CD or a savings account. This means the deposit, in theory, isn't burdened with the reality of taxes in the present.
Taxes are deferred until a future date. That future date can start as early as when a person reaches age 59 1/2 or be postponed until age 70 1/2, in most cases. The thinking is the annuitant will be in a lower tax bracket. If this is true, the value of the deferred dollar has indeed been greater than a taxed dollar.
Of course, things like inflation, deflation, economic crash, boom cycles, etc., can wreak havoc on any investment. The hope is none of these conditions will actually come to fruition while your annuity grows.
The time value of money is an important concept and because annuities offer the tax deferral feature, they are an excellent investment for most people.