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Smart Investor Tip of the Day
The best way to understand what annuities are is to imagine yourself late into your retirement years; a time in your life when you are very much dependent on retirement income (e.g. an RRIF account). However many types of retirement accounts are limited to the amount of money held in them. In most cases proportionate amounts of this balance is paid out to the retiree over the course of many years during their retirement. However, there is a problem. When the balance held in such accounts run out then you are stuck with no more retirement income.
Fortunately many people have realized this unfortunate reality that the life insurance industry devised a clever solution that helps insure against this potential risk.
Think of annuities as life insurance in reverse. What I mean is, we all know that life insurance pays the insured when dead, but in the case of annuities, payments are made to the living. So, depending on the underlying agreement, there is a contractual obligation for one side to make continuous and consistent payments to another until an event occurs, such as death.
So annuities are retirement investments that are sold by banks and set up in a way to accept and build funds (through premiums) by individuals who then receive payments at a later point in time for a fixed period or for the rest of their lives. Annuities solve the problem of a person outliving their own income stream.
If the annuitant dies before receiving all payments (through a fixed-term contract) then what remains will be paid to their beneficiary. An interesting fact about life annuities is that male annuitants will receive a slightly high regular periodic payment than their female counterparts. The reason is because mortalities studies consistently show that females on average live longer than males, and so it makes more sense to keep payments slightly higher for men since they may not live as long; while for females because they are more likely to live longer they would need to have a steady income lasting much longer.
Did we mention annuities also provide favorable taxations too? Annuities are taxed more leniently than non-registered fixed-income products.
If you haven’t heard about annuities until now then it might be time to explore it further and help secure your retirement years to the best of times.