Basic Annuities

There are generally two types of annuities:

Term Certain or Fixed Term annuities pay a periodic income for a specific pre-determined length of time or number of payments. Once this period is over, income payments cease and the annuity contract ends. A person would purchase an annuity like this if a guaranteed income stream was needed for a specific time period. When purchased with non-registered funds, the interest portion of your monthly payment is spread out evenly over the time period chosen. This levels out tax payments and minimizes taxes paid. If the annuitant dies before receiving all guaranteed payments, the remaining payments will be paid to a beneficiary.

Life annuities come in two different forms, single or joint. Single Life annuities pay a periodic income as long as the sole annuitant is alive. Joint Life annuities pay a periodic income as long as one of the two joint annuitants is alive. Annuities can be purchased with registered funds from individual RRSPs, locked-in RRSPs, Pension Plans or Deferred Profit Sharing Plans. Life annuities can also be purchased with "after-tax" or "non-registered" funds.

Life annuities can be purchased as single premium immediate annuity (SPIA)where the purchaser provides a lump sum of money to an insurance company which in turn guarantees a regular periodic payment starting the following month. The insurance company makes these periodic payments as directed by the purchaser, monthly, quarterly, semi-annually or annually.

Guaranteed life annuity payouts are higher for males than they are for females of the same age because mortality tables show that females on an average live longer than males. When a male and female of the same age purchase individual life annuities, the male will receive a slightly higher periodic payment than the female because the male's life expectancy is shorter.

A guarantee period from 0 years to 10 or more years can be included in a single or joint life annuity. This ensures that the periodic income continues for a specified minimum length of time or number of payments whether or not the annuitant(s) is/are alive. Thereafter, payments continue as long as the Single Life annuitant, or one of the Joint Life annuitants, is alive. If the annuitant (Single)or both annuitants (Joint) die prior to the expiration of the guarantee period, the remaining guaranteed periodic payments may be paid as scheduled to a beneficiary or as a lump sum (that is, payment is commuted). Make certain to ask about the implications of the length of guarantee period in the life annuity you purchase.

Reducing or non-reducing joint life annuities determines whether or not a surviving annuitant receives less periodic income or the same periodic income in the event of the death of the other annuitant. If more immediate income is required at the beginning of a joint annuity, then it can be directed that upon the future death of the primary annuitant or specifically either one of the annuitants, then the surviving annuitant would receive less periodic income for life. Most annuities that I sell have been non-reducing or in other words, it doesn't matter who dies first, the same income is paid for life to the survivor.

Deferred single or joint life annuities are those that are purchased with the first payment commencing on a date which is more than one payment period after the purchase date. If an annuitant or annuitants dies prior to the first periodic income payment, the premium may be refunded at a specific rate of interest or with no interest.

Prescribed or non-prescribed annuities is a term related to non-registered life annuities only. The income from an annuity purchased with non-registered funds is the same for both prescribed and non-prescribed status. However, prescribed annuities have a level portion of the periodic income attributed to tax. Non-prescribed annuities have a heavier portion of periodic income attributed to tax in the early years of the annuity and less in later years. This results in less tax being paid up front for a prescribed annuity than for a non-prescribed annuity.

Indexed Annuities protect the annuitant from inflation in the future. Prescribed non-registered annuities are not available for this benefit. Only non-prescribed annuities may be purchased with non-registered money.

Impaired Annuitiesare offered by some insurance companies. Proof of a diminished life span is required for consideration of this kind of annuity. This is a case where poor health raises the likelyhood of increased life annuity payments because of shortened life expectancy. If you have a health concern, make certain that you reveal it when investigating annuity payouts.

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