What are annuities and how do they work?

An annuity is a contract with a life insurance company where you pay a lump sum of money at the start of the term.  In return, the life insurance company guarantees to pay you a set income, in regular instalments for an agreed period of time.

When to consider an annuity?

You may want to consider an annuity if you have maxed out other tax-advantaged retirement accounts such as your Registered Retirement Savings Plan (RRSP) or Tax Free Savings Account (TFSA).

There are also additional reasons why you would consider an annuity:

You aren’t comfortable with the fluctuations in the stock market. While stock-based investments fluctuate in value daily, annuities don’t.  Annuities protect your principal, ensuring your investment remains intact during the life of the contract to earn income in the future. This is of particular importance when you’re nearing retirement or in retirement. Annuities provide income while relieving you of the worry of potential losses. Annuities are great for covering fixed expenses in retirement.

You want guaranteed and predictable income. When you buy an annuity, you can choose to have it pay you an income stream immediately or you can defer the income stream until later. In addition, at the time you purchase the annuity, you decide exactly how much you will receive and for how long. Select ownership, time frame and taxation options at the time of set up to suit your individual needs.  For example, if you’re married, you can add options that guarantee income for as long as either you or your spouse lives.

You want guaranteed income for a certain time period or for life. When you buy a life annuity, the life insurance company pays you a guaranteed income for an agreed upon period or the rest of your life.

You want to achieve specific legacy or estate goals. Use annuities as part of your estate planning goals, such as to gift money for your beneficiaries, estate or charities. Fund a life insurance that pays your beneficiaries a lump-sum amount on death with an annuity. Provide a stable, consistent, guaranteed income for a disabled child by setting up an annuity for them.

Please note that once you purchase an annuity, you can’t access your investment.  Your initial investment and annuity payments are locked in for the life of the contract. Once the annuity is set up, no changes can be made.  Therefore, while annuities have many benefits, they are extremely inflexible.

There are a number of reasons why you should consider purchasing an annuity.  Talk to us today and we can help you consider your options.