Annuities provide regular income for life, or for a set period, in return for a sum of money

Annuities are financial products that pay you (the annuitant) a steady stream of income for an agreed number of years or for the rest of your life.

You give a sum of money to an insurance company and they send you the payments, usually on a monthly basis, until the number of years is reached or until you die.

The following factors affect the amount of monthly payment received:-

  • Having the payments continue to a surviving spouse or other designated party in the event that the annuitant dies.
  • Indexing the payments received to allow for inflation.
  • The amount of money invested.
  • The interest rate at the time of purchase.
  • Age and sex.
  • The type chosen.

Here are the main types:-

Single Life

Provides pre-determined income for an individual as long as they are alive. When the individual dies, the contract ceases.

Term Certain

Guarantees a set monthly income for an agreed number of years. If you die before the agreed period is over, the remaining payments continue to go to named beneficiaries or your estate. 

Joint and Survivor Life

Designed to cover the lives of two individuals (usually husband and wife). Income is paid to the first partner and, upon his or her death, the remaining partner continues to receive that income for his or her lifetime. Initial income can be increased, if an income reduction is pre-selected to occur at the death of one partner.

Prescribed

A lump sum of non-registered money invested over a fixed period of time or your lifetime. This type is tax friendly because each payment is comprised of two components. One:- interest earned which is taxed and two:- return of a portion of the original capital which is not taxed. The total income received is higher because you pay fewer taxes.

Insured

This type is a unique concept. You purchase two contracts; a prescribed annuity to provide you with an income for your life and an insurance policy to protect the amount you paid for the annuity. You use your higher steady stream of income to pay for the insurance policy. Make sure you qualify for the insurance before you proceed.

All types, except for prescribed and insured, can be purchased inside registered funds (RRSPs, RRIFs, LIFs, LRIFs) and the income will be fully taxable.

They are easy to manage and provide guaranteed income, however, they are usually not indexed and do not provide you with any investment flexibility. If you want to enhance your annuity, for example - provide inflation protection or provide income to your spouse - your payments are significantly reduced.

Castle

Today's low interest rate environment presents a challenge for this particular financial product.  When rates rise, which they surely must do one day, it will once again become an attractive option for those wanting as much certainty and safety as possible  

As with all products, some companies are more competitive than others, so shop around.

Contact your financial adviser or insurance broker to determine if it's the right strategy for you.

Your comments? 

 

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