Know Your Financial Terms- What's an Annuity?

An annuity is an investment product issued by insurance companies that are often used to fund retirement.  They generally require the investor to make a lump sum payment and then receive a stream of even payments over a fixed period of time.

The company agrees to provide a payout from a particular date and continues payouts for a defined period, often set at 20 years, or till the death of the annuitant or spouse.

The monetary contributions into an annuity are invested into various interest-bearing opportunities until it is required.

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Types of Annuities

There are generally two types of annuities:

Immediate Annuities- these pay your income right away (or almost right away). You make a single lump-sum payment to the insurance company and payment is available one annuity period after your purchase. 

Deferred Annuities- these offer tax-advantaged saving and lifetime income as it accumulates interest. You begin receiving payments years or decades into the future. Your premiums grow tax-deferred inside the annuity. 

To know if an annuity is right for you, it is important to consider your retirement income including RRSPs, your tax situation,  your risk tolerance, what you want to leave to beneficiaries, and your own needs and retirement timelines. 

WealthyPlanet's "Wealthopedia"  series demystifies financial terms and financial industry lingo. 

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