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.
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.
A term certain annuity gives you a guaranteed regular income for a set number of years (the term). Term-certain annuities bought with money from an RRSP or RRIF must extend to age 90. If you die before the end of the term, your payments will continue to go to your estate.
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.
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.
Learn more about annuities at GetSmarterAboutMoney.ca