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Annuities
An annuity is an investment that you make, either in a single
lump sum or through instalments paid over a certain number
of years. Generally the income starts one month after the
deposit if it is to be paid monthly, or one year after the
deposit if it is to be paid annually. An annuity does not
provide any life insurance cover but, instead, offers the
annuitant guaranteed income throughout his life or for a specific
time period.
The payments from a life annuity are a blend of interest and
capital and are usually a level payment, although they can
be indexed annually to a maximum of 4% per year. Each time
a payment is made, the amount of capital remaining in the
annuity is reduced thereby reducing the capital based on which
future interest can be earned.
Types of annuities
Non-registered annuities may be purchased as a prescribed
annuity or as a non-prescribed annuity. The two types of annuities
differ in their tax treatment.
Prescribed Annuity
A prescribed annuity provides for a level tax treatment so
the same amount of taxable income is reported each year of
the contract.
Non-Prescribed Annuity
A non-prescribed annuity works on an accrual method: as more
taxable income is reported in the early years and declines
every year so less taxable income is reported the longer the
annuity contract is in force.
When do I receive annuity payments?
Immediate Annuity
With a immediate annuity you start receiving annuity payments
as soon as you pay the premium, which is usually in a lump
sum.
Deferred annuity
The payments to the annuitant start after a certain deferment
period. Typically, the annuitant pays annuity premiums in
instalments during the deferment period.
Generally, you will pay less premium for an annuity that provides
future payments because the deferment period allows the insurance
company to invest your premiums at a profit, thereby reducing
the cost of the annuity to you.
How do I receive payments from an annuity?
There are several options that are used when the proceeds
of an annuity are distributed.
Life Annuity
The first is a life annuity, which guarantees you a specified
amount of income for your life. On death, the annuity payments
cease and no value is available to be passed on to a beneficiary
no matter how long the annuity is in force.
Life annuities with a Guarantee Period
A life annuity with a guarantee period on other hand provides
you with a specified income for a guaranteed number of years
(i.e. 10, 20…). The guaranteed period refers to the
period for which the annuity will be paid out in the event
of the death of the annuitant. For example, if the annuitant
has a to age 90 guarantee and they die at age 72, the beneficiary
will receive payments for another 18 years. If the annuitant
lives beyond age 90, payments would continue until death,
after which the beneficiary would receive nothing.
The longer the guarantee period, the lower the annuity payment.
Term Certain Annuities
A Term Certain annuity provides payment for a fixed number
of years, and no value remains at the end of the term. Typical
terms are 5, 10, 15, or 20 years, or to a maximum of age 90.
Joint and Last Survivor Life Annuities
Joint and last survivor life annuities are similar to single
life annuities, but payments are paid to annuitant for as
long as they both live. Upon the death of one of the annuitants,
the payments continue to the surviving annuitants for the
remainder of his or her life.
These annuities can be offered with a zero guarantee period
in which payments would stop after the death of both annuitants
or with a guarantee period that allows for payments to continue
to a beneficiary. Another option available is to have the
payments decrease upon the first death of the primary annuitant
(usually to 50, 60, or 70%).
For more information, please feel free to contact
us.
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