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Annuities
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An annuity is a lump sum of cash invested to produce a monthly stream of income for a fixed period or for life. An annuity is a long-term investment that gets issued by an insurance company designed to help protect you from the risk of outliving your income. Through annuitization, your contributions are converted into periodic payments that can last for a lifetime. Annuities can be bought for safety, long-term growth or for income
You can buy an annuity with the money from your following accounts: RRSP, RRIF, and non-register accounts.
The money will be paid out to you with interest, in regular payments based on what you have decided upon purchasing the annuity. The payment options could be monthly, quarterly, semi-annual, or annual payments.
1. Term-certain annuity
If you are looking for guaranteed regular income for a set number of years, then this option is for you. Term-certain annuities bought with money from an RRSP or RRIF must extend to age 90. If you pass away before the end of the term, your payments will continue to go to your estate.
2. Life 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.
With annuity, you have the choice to add a number of options to your purchase. Generally, the more options added to the product, the higher the cost of the annuity which in turn reduces the payments you will receive.
Here are 3 of the most common options.
1. Joint-and-last-survivor
If you’re married or have a common-law partner, this option guarantees that the payments from the annuity will continue for as long as either you or your spouse or partner lives. Adding this option may reduce your payments by up to 25%.
2. Guaranteed benefit
If you’re buying a life annuity, this option guarantees you a certain number of payments over a certain period of time, usually 5, 10 or 15 years. That means if you die before the end of the period, your beneficiaries or your estate will continue to receive your payments until the period ends.
3. Indexing
This option automatically increases your annuity payments to keep up with inflation. As prices rise, your monthly income will buy less in the future than it does today. This option can lower your initial annuity payments by as much as 30% to 45%.
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