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WHAT IS AN ANNUITY?
An annuity is a fixed annual allowance provided by an investment. An annuity can provide a guaranteed regular income for the rest of your life or for a specified number of years. The amount of income provided through an annuity is generally determined at the time of purchase, and will depend on: the amount of money deposited, the current interest rate, your age, your sex, and the number of years for which the company promises to make payments. You decide how often you wish to receive payments (ranging from monthly to annually) and if you want your payments indexed to help offset inflation.
TYPES OF ANNUITIES
Life Annuities are offered only by life insurance companies, which are required by law to set aside reserves to guarantee the payments they have promised. When a life annuity is used to provide retirement income, a minimum guaranteed number of payments can be selected to provide a death benefit to your beneficiary if you die before the end of the guarantee period.
There are two types of life annuities:
•Single Life Annuity – payments are guaranteed on your life. You can select a minimum guaranteed payment period that will provide a death benefit to your beneficiary if you die before the end of the guarantee period.
•Joint and Survivor Life Annuity – guarantees an income for the lifetimes of you and your spouse. This type of annuity can also have a minimum guaranteed payment period to provide a death benefit in the event that both annuitants (i.e. you and your spouse) die before the end of the guarantee period.
If you are purchasing an annuity with locked-in pension funds and you have a spouse, you are required to purchase a joint and survivor life annuity. You may purchase a single life annuity only if your spouse consents in writing.
Fixed Term (Term Certain) Annuities may be offered by banks and trust companies as well as by life insurers. Legislation requires a term certain annuity funded by RRSP money to continue until the time you or your spouse reach age 90. At that time, the payments will stop. The major differences between the life annuity and the term certain annuity are the amount of income they provide and the benefit to your heirs.
OTHER TYPES OF ANNUITIES
A Deferred Annuity is just as its name suggests. You can purchase an annuity now and your income payments can be deferred to a specific date in the future. For registered funds, the annuity must be purchased by the end of the year you turn 69, and income payments must start by the end of the year you turn 70. You are also required to take a full year's worth of payments in this first year. The advantage here is that you can lock in interest rates today, even though you don't want the income until some time in the future. Accelerated (Impaired) Annuities are available for people with health problems that will affect their life expectancy, such as a history of heart problems, cancer or high blood pressure. With this type of annuity, life insurance companies will pay out a higher monthly amount than to someone who has excellent health. Medical evidence is required to qualify for this type of annuity.