An annuity is an investment that pays you a set monthly income for a set period of time. You can even get guaranteed income for life.
How do annuities work?
An annuity works like life insurance in reverse. With life insurance, you pay a certain amount each month over many years so your loved ones will get a lump sum when you die. With an annuity, you pay a lump sum up front, and get income back each month over many years.
The size of your monthly payment will be higher if you buy when interest rates are high. For most people, it's better not to put all your money into annuities when interest rates are low. The type of annuity also affects your monthly income.
What types of annuities are there?
1. Term-certain annuities
This type of annuity guarantees you a set monthly income for as many years as you want, up to age 90. If you die before you receive all your payments, they continue to go to your estate.
2. Life annuities
A life annuity gives you a set monthly income for life. Payments will stop when you die and no money will go to your estate. You can change this if you add extra options to your agreement. For example, you can get a life annuity that makes payments to your spouse after your death. You can get an annuity that increases your income to keep up with rising prices. But with each extra option you choose, you get a lower monthly payment.
Remember: You buy an annuity to get guaranteed income
Make sure you understand how interest rates and other factors will affect how much income you can get.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.