Life annuity and annuity certain

Managing one’s savings by investing or having a representative do it isn’t necessarily the best choice for everyone. There’s another option: an annuity.

What is an annuity?

An annuity allows you to receive a regular amount over a fixed period of time or for the duration of your retirement. To receive the payments, you have to buy the annuity. For example, at 60 years old, you buy an annuity costing $250,000, and it will pay you a fixed amount of $1,250 per month for the rest of your life.

How is the purchase price and the amount paid out by the annuity determined?

The purchase price of the annuity is based on several factors:

  • The payment amounts you want to receive
    The higher the payments, the higher the purchase price of the annuity.
  • Interest rates
    The higher interest rates are when you buy your annuity, the higher the payments you’ll receive. Why? Because your insurance company will make a bigger profit when it invests the money. Conversely, the lower interest rates are when you buy your annuity, the lower the payments you’ll receive.
  • The duration of the payments
    The longer the insurance company anticipates having to make payments to you, the more expensive the annuity will be. Therefore, the older you are when you buy an annuity, the less it will cost you.

Based on the same logic, if you have a specific amount to buy your annuity, the payments you receive will be higher if:

  • interest rates are high
  • the payments are made over a short period (either because an end date has been determined or because your life expectancy is shorter).

The advantage of an annuity

In most cases, the funds you used to purchase an annuity no longer belong to you. Your money is converted to the series of payments specified in the contract.

The advantage: You don’t need to manage a stock market portfolioA portfolio is a group of various investments made by a person or a company.
For example, an investor’s portfolio can contain shares, bonds, mutual funds, options and other financial instruments. . In addition, no matter whether the market goes up or down, you’ll receive the payments set out in the contract.

What are the main types of annuities?

Here are two types of annuities: An annuity certain pays you a regular amount until a pre-determined date. A life annuity pays you a regular amount until your death.

Annuity certain (also known as a guaranteed or fixed annuity)

This annuity pays you a set amount over a pre-determined period of time. For example, you can buy an annuity that will pay you $500 a month for 20 years.

The two main advantages of an annuity certain are that:

  • you’ll receive payments, regardless of market fluctuations
  • if you pass away, your heirs will receive the annuity payments

This annuity may or may not be indexedIncome is indexed if it is regularly adjusted to fully or partially offset cost of living increases. .

  • Indexation
    As the cost of living increases, you’ll need more money to maintain the same standard of living. To deal with this problem, you can buy an indexed annuity. The amount of your payments is based on:
    • a cost of living index
    • or a percentage determined when you buy your annuity.

Life annuity

A life annuity pays you a regular amount and is guaranteed until your death.

There are several options available with a life annuity. Note that these options will increase the purchase price of your annuity.

  • Option: survivor clause
    When you buy a life annuity, you’ll receive regular income until your death. The survivor clause guarantees that, upon your death, your spouse will be paid your annuity or a portion of it while alive.
  • Option: guarantee
    This option ensures that you’ll receive payments for a set number of years. For example, let's say you buy a life annuity guaranteed for 10 years.
    • If you die during the first 10 years of the annuity payment period, your beneficiaries will continue to receive payments until the end of the tenth year.
    • If you live more than 10 years, you’ll receive payments while you’re alive.

How many years do you expect to live?

No one knows what age they’ll die at. Some people have fragile health all their lives but die in old age. Others who have always been in excellent health are struck down much younger.

If you die shortly after acquiring an annuity, you’ll have received very few payments. The survivor and guarantee options allow someone close to you to receive the payments after your death.

What happens if your insurance company can’t pay your annuity?

Assuris is an organization that protects against insurance company bankruptcies. If your insurance company can no longer pay your annuity, Assuris will pay you either the full amount or a portion of it.

For more details, visit the Assuris website This link will open in a new window.