An annuity is a good way to ensure that you won’t outlive your retirement income. They were created to reduce this risk, also known as superannuation. As an annuity beneficiary, you’re guaranteed to receive a certain minimum amount of income, paid out on a set schedule, until you die. This is even if this amount ends up exceeding the amount of money you have invested into your contract, its gain or its accrued interest.
How an Annuity Works
Initially, annuities were designed with the consumer making a series of payments or a lump-sum payment into their contract. Upon retirement, they would begin receiving payments. Meanwhile, payments are invested in accumulation units that will accumulate within the contract until the beneficiary begins to receive his or her payments.
Annuitization occurs when the accumulation units are converted to payments. Options include:
- Straight Life – You receive an actuarially-calculated amount based on your life expectancy. The payments end when you die and the remainder of the money left in your contract is retained by the insurer.
- Joint Life – Similar to straight life, but payments continue to the surviving partner.
- Life with Period Certain. This contract makes payments for life, but is also guaranteed to pay for a certain period of time, e.g. 20 years. If you die before the predetermined time, payments or a lump sum will be paid to your designated receiver.
- Joint Life with Period Certain – Similar to life with period certain, but guaranteed payments will apply to both beneficiaries if both die before time period is over.
After reaching the age of 59 and a half, you could also choose a systematic withdrawal or a single lump sum payment without annuitizing your contract.
