Types Of Annuities

Annuities come in a wide range of combinations and permutations of the basic life annuity and term annuity models. These can cause confusion for the investor, and so the type of annuity being purchased requires close scrutiny.

SINGLE LIFE ANNUITY

This form of annuity provides an income to an annuitant for life. It can provide a payment to a beneficiary if the annuitant dies within a specified period of time. This payment may be received as a lump sum or as periodic payments.

JOINT LIFE ANNUITY

This form of annuity provides an income to both spouses for life. The annuity payment continues to the surviving spouse past the death of the first spouse either in full or on a reduced basis. The reduction in the payment may be by a fixed dollar amount or a percentage.

Options are available that will again see a beneficiary named to receive funds if the joint annuitants covered by the contract die prematurely.

PRESCRIBED ANNUITY

An annuity may be “prescribed” or “non-prescribed.” This feature describes the taxation of a non-registered annuity. When the annuity is prescribed, the taxation is the same each year. In a non-prescribed annuity, the interest portion of each annuity payment decreases over time so that the taxable amount of interest decreases.

TERM ANNUITY

Also called a “term certain annuity,” this annuity not only pays an income for a certain period, but also will make a payment to a beneficiary if the annuitant dies during the term.

VARIABLE ANNUITY

With a variable annuity the investor’s funds are used to buy annuity units that can be based on a portfolio of stocks, bonds, or other investments. The value of the units rises or falls based on these underlying investments. Variable annuity contracts may give the annuity holder some flexibility in determining the amount of income to be received by allowing him or her to adjust the number of units redeemed at payout.

These annuities are the riskiest because of their alignment with riskier investments and should be closely investigated prior to purchase.

INDEX-LINKED ANNUITY

The rate of return for this form of annuity is linked to the return of a market index. Thus, this is another type of annuity whose payments change over time. In this way, an investor can benefit from an upward stock market trend without buying stocks directly.

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