Page 231 - A Canuck's Guide to Financial Literacy 2020

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Annuities

Annuities are financial investments that provide a steady and reliable stream of income.
Annuities are particularly useful for those who are in retirement and are looking for a stream
of income to supplement their Canada Pension Plan and Old Age Security payments.
They're highly desirable, widely available and investor protected.

How Annuities Are Formed

Annuities are often provided by insurance companies or banks. These are referred to as the
annuity providers. An investor would sign a contract with the annuity provider where his
principal or lump sum amount would be used to fund the contract. The investor would name
a beneficiary on the contract that would receive the income payments. This beneficiary is
referred to as the "annuitant".

Types of Annuity Payments

The annuity provider would assign an interest rate to the contract and the payments made
to the annuitant would be a combination of investor's principal plus interest. This is known
as the annuity payment. The annuity payment would depend on the prevailing interest rate
at the time of the contract and the principal amount invested. The larger the principal
invested, the higher the annuity payments. The annuity rates offered by insurance
companies would differ which is why it's important to shop around.