An Annuity is a product that is offered by Insurance Companies and it provides a guaranteed income during retirement. Unlike other retirement income products such as a Life Income Fund (LIF) or a Retirement Income Fund (RIF) an Annuity can be purchased with both registered money from an Registered Retirement Savings Plan or non registered money such as personal savings or an inheritance.
Types of Annuities
There are several different types of Annuities available to investors but the basic concept is the same for all products. An annuity is a fixed contract between an investor and a company. The investor agrees to invest a one-time lump sum amount of money and in turn the company guarantees regular payments over a pre determined period of time. The payment amounts are calculated based on various factors such as the investment amount, interest rates, the persons age, their projected life span, and their gender.
Life Annuity
A Life Annuity is flexible in the sense that it can be purchased as a Straight Life Annuity or with various options. A Straight Life Annuity is a sole owner investment. It provides a regular income stream to the investor until the age of death.
A Life Annuity can also be purchased with a term of 5, 10, 15, or 20 years. This guarantees that payments will continue on to a beneficiary for a fixed number of years after the investor passes away. If no term is purchased, then payments stop on the investors’ date of death.
Term Annuity
A Term Annuity is purchased for a fixed number of years such as 5, 10, 15, or 20 years. At the end of the term all payments stop and there is no option for renewal or extension of the term. If the investor dies before the term is over a lump sum death benefit will be paid to the beneficiary.
A Joint and Last Survivor Life Annuity pays a regular guaranteed income until the death of the longest living spouse.
Investors should think of an annuity as exactly the opposite of a mortgage. With a mortgage a company lends a large lump sum amount to their client and in turn the client agrees to make regular payments over a period of time. With an annuity the person invests a large lump sum amount with the company, and in turn the company makes regular payments to the investor over time.
Annuities can be used as an investment product to accompany a retirement strategy. Please discuss retirement options and strategies with your Investment Advisor.
