A life annuity works somewhat like a loan that is made by the purchaser (contract owner) to the issuing (insurance) company, which pays back the original capital or principal (which isn't taxed) with interest and/or gains (which is taxed as ordinary income) to the "annuitant" on whose life the annuity is based. The assumed period of the loan is based on the life expectancy of the annuitant. In order to guarantee that the income continues for life, the insurance company relies on a concept called "cross-subsidy" or the "law of large numbers". Because an "annuity population" can be expected to have a distribution of lifespans around the population's mean (average) age, those dying earlier will give up income to support those living longer whose money would otherwise run out. Thus it is a form of longevity insurance (see also below).