Basic Annuity Types

There are two general types of annuities:

Term Certain/Fixed Term annuities

Term Certain or Fixed Term annuities pay a periodic income for a specific predetermined length of time or number of payments.

Life Annuities

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. Annuities can also be purchased with "after-tax" or "non-registered" funds.

A single premium immediate annuity (SPIA) is like life insurance in reverse. The purchaser provides a lump sum of money to an insurance company which in turn guarantees a regular periodic payment. These periodic payments are made monthly, quarterly, semi-annually or annually. The payments usually cease upon death of the owner.

The similarity to life insurance in reverse continues when we consider that male life insurance rates are higher than female life insurance rates for persons of the same age because mortality tables show that females on an average live longer than males. When the same male and female of the same age purchase individual life annuities, the male will receive a higher periodic payment than the female because the male's life expectancy is shorter. The best life insurance rates are based on good health of the applicants, while 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.

Some of the benefits of being male or female are lost when locked-in pension funds are used to purchase a life annuity because it is mandatory that unisex rates be used to calculate periodic payments.

Single or Joint Life annuities may include a guarantee period which 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 or as a lump sum (that is, payment is commuted).

Joint Life annuities may be sold as Reducing or Non-Reducing. A reducing annuity would see the surviving annuitant receive a reduced periodic income in the event of the designated primary annitant's death or the first death. In the case of a Joint Life Reducing Annuity with a guarantee period, the reduction in periodic income would occur only after the death of one of the joint annuitants and the expiration of the guarantee period. (The guarantee period guarantees the number and amount of the payments.)

Single or Joint Annuities are described as being Deferred if payments commence 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.

Annuities purchased with non-registered funds are described as being either Prescribed or Non-Prescribed. Prescribed annuities generally qualify for a more favourable income tax treatment than do non-prescribed annuities. The income from an annuity purchased with non-registered funds is the same for both prescribed and non-prescribed status. It is the tax treatment of the income that is different.

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