An annuity is a contract with a life insurance company. You deposit a lump sum of money, and they agree to pay you a guaranteed income for a set period of time — or for the rest of your life. Annuities are most commonly used to generate retirement income.
The money is returned to you, with interest, in regular payments. You can choose to receive payments for a set number of years or for the rest of your life. You can receive monthly, quarterly, semi-annual or annual payments.
How annuity payments work
Your annuity income is calculated when you buy the annuity. It is affected by a number of factors — the most important are interest rates and how long you’re expected to live.
Once you buy an annuityAnnuity A contract usually sold by life insurance companies that guarantees an income to you or your beneficiary at some time in the future. An annuity is a contract with a life insurance company. When you buy an annuity, you deposit a lump sum of money, and the insurance company agrees to pay you a guaranteed…+ read full definition, you can’t make any changes to it. Your regular payment amounts are locked in, and you can’t change them for any reason.
If you’re over age 65 and do not have a company pension plan, you may be able to claim the pension income tax credit. This means you won’t be taxed on the first $2,000 of annuity income each year.
2 types of annuities
1. Term-certain annuity
A termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition-certain annuity gives you a guaranteed regular income for a set number of years (the term). Term-certain annuities bought with money from an RRSPRRSP See Registered Retirement Savings Plan.+ read full definition or RRIFRRIF See Registered Retirement Income Fund.+ read full definition must extend to age 90. If you die before the end of the term, your payments will continue to go to your estateEstate The total sum of money and property you leave behind when you die.+ read full definition.
2. Life annuity
A life annuityLife annuity A life annuity gives you a guaranteed regular income for life. Payments usually stop when you die, and no money will go to your estate. You may choose to add an option that allows your spouse, beneficiary or estate to continue to receive your payments after your death.+ read full definition gives you a guaranteed regular income for life. Payments usually stop when you die, and no money will go to your estate. You may choose to add an option that allows your spouse, beneficiaryBeneficiary The person(s), institution, trustee or estate you choose to give money, property or other benefits when you die. You may name beneficiaries in your will, insurance policy, retirement plan, annuity, trust or other contracts.+ read full definition or estate to continue to receive your payments after your death.
Guaranteed Minimum Withdrawal Benefit (GMWB)Guaranteed minimum withdrawal benefit (GMWB) Guaranteed minimum withdrawal benefit (GMWB) products are a combination of investments and insurance. This is known as a variable annuity. With GMWB products, you get a guaranteed minimum income from your savings each year – starting as early as age 50 for some products. They also provide the potential for investment gains to help increase…+ read full definition products
GMWB products are a type of annuity that provides guaranteed retirement income that can increase with investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition gains in your portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition and with certain bonus features. Learn more about GMWB products.
3 ways to buy an annuity
- In person from a licensed insurance agentInsurance agent A person who is trained and licensed to give expert advice and sell insurance. Some get extra training so that they can also sell investments. They get paid by the companies whose products they sell.+ read full definition or brokerBroker A registered person who brings together someone who wants to buy investments with someone who wants to sell. Brokers often charge a fee or commission for buying and selling investments for you.+ read full definition
- Online or by phone from a broker or insurance companyInsurance company A company that sells insurance products. Some companies sell only life insurance. Some sell only property insurance. Others sell all types of insurance.+ read full definition
- A financial advisor who is licensed to sell insurance
Some investment firms may also have a licensed broker on staff who can sell annuities.
Compare annuity rates
Once you buy an annuity, your regular payments are locked in. You can’t change them for any reason. It’s worth shopping around to compare annuity rates.
How your annuity is protected
If your annuity provider goes out of business, your annuity is insured up to certain limits. The first $2,000 per month of your annuity income is insured at 100%. Amounts above this are insured at 85% if the firm is a member of Assuris.
The insurance that covers your annuity is automatic. You don’t have to do anything, and you don’t have to pay anything extra to get it.
You can choose to receive annuity income for life, or for a set number of years.
Once you buy an annuity, you can’t get your savings out and you can’t make any changes to it. Your regular payments are locked in.