Life Annuities

Life Annuties by Lita M.

Life Annuities

An annuity is a series of income payments or receipts made yearly or at other regular intervals.  You, the annuitant, are the recipient or beneficiary of an annuity.  An annuity contract is an agreement made with a financial institution or life insurance company to provide you with an annuity. 

Life Annuities contract the policy provider to make regular and periodic payments to you for the duration of your lifetime, regardless of how long or short your life may be.  Upon your death, a life annuities contract will terminate and the remainder of the funds accumulated will be forfeited unless there are other annuitants or beneficiaries designated in the life annuities contract.

While any financial institution can offer term annuities - a contract for you to receive regular or periodic payments for a specified period of time - only life insurance companies can offer life annuities.  The owner of life annuities is referred to as policyholder while the insurance company may be referred to as the policy provider or issuer.

The income payments you receive from life annuities are made up of principal and interest and will be determined on factors that include your age, current interest rates, the length of time payments are guaranteed and the amount of money you invest to purchase the life annuity. You could consider your life annuities as a form of longevity insurance as, in exchange for a sum of money, you will enjoy a steady stream of income for the remainder of your life as well as benefitting from the security that you will never outlive your money.  Unlike other investments, with life annuities you will never have to worry about market fluctuations or other investment decisions.

The term or time period used to calculate payments for life annuities is an estimate of the life expectancy of you, the annuitant, who is purchasing the life annuity. While developing your policy payments for life annuities the policy provider will rely heavily on actuarial information.  Using the appropriate mortality tables is important in the case of life annuities as some policyholders live beyond their life expectancies which will offset the savings realized when other policyholders die prior to reaching the average age of death.  The actuary is likely to choose a term that is different from the average life expectancy for the Canadian population as a whole as annuity purchasers are likely to have different mortality characteristics.  This actuarial process allows some margin of error in favor of the insurance company while at the same time securing the insurance company a competitive spot in the marketplace.

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