An annuity is a contract that provides income payments at regular intervals, usually for a specified period or for the lifetime of the annuitant. Income payments may begin right away or be postponed to some future date.
A life annuity is a form of insurance, where the uncertainty of an individual's lifespan is transferred from the individual to the insurer, which reduces its own uncertainty by pooling many clients. Annuities can be purchased to provide an income during retirement, or originate from a structured settlement of a personal injury lawsuit. A Life Annuity may be purchased as a Single or Joint Annuity where payment continues for the survivor.
Term-certain payout annuities pay guaranteed income payments for a specified period of time. If you die before your annuity reaches the end of the term, your beneficiary receives a lump-sum payment equal to the value of the remaining benefit. If your spouse is your beneficiary, he or she may choose to receive the lump sum or to continue receiving payments until the end of the term.
The Income Tax Regulations contain a lengthy list of conditions that an annuity must meet to qualify as a prescribed annuity. The purpose of a Prescribed Annuity is to equalize taxation on investment income so that taxation is relatively equal throught the the life of the Annuity, with some of the payment received being essentially a return of premium and therefore not considered taxable.
An Age Rated Annuity can result in lower premium or higher income than for someone of the same age and sex without a life-shortening condition such as severe, permanent and progressive illness. Only life annuities can be impaired annuities. In simple terms, the Life Insurance Company's underwriter rates the clients effective age by "adding years" based on health conditions at the time of application, and then proceeds to calculate payments or premiums on the advanced age.
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Defined Contribution Pension Plan: A plan where contributions by employees and the employer are fixed and the benefits depend on the contributions and their earnings.