Annuities are one way to generate income in retirement. There are different options you can add to the annuity you want to purchase. Find out more about annuity options and tips if you’re considering buying one.
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What are annuity options?
When you deposit a lump sum of money to buy an annuity, the life insurance company agrees to pay you a guaranteed income for a set period of time, or for the rest of your life.
When you buy an annuity, you can choose to add different options. The more options you add, the higher the costs of your annuity and the lower the payments you receive.
Read how annuities work.
The three most common options are:
1. Joint-and-last-survivor
If you’re married or have a common-law partner, this option guarantees that the payments from the annuity will continue for as long as either you or your spouse or partner lives. But adding this option may reduce your payments by up to 25%.
2. Guaranteed benefit
If you’re buying a life annuity, this option guarantees you a certain number of payments over a certain period of time, usually five, 10 or 15 years. That means if you die before the end of the period, your beneficiaries or your estate will continue to receive your payments until the period ends.
3. Indexing
This option automatically increases your annuity payments to keep up with inflation. As prices rise, your monthly income will buy less in the future than it does today. This option can lower your initial annuity payments by as much as 30% to 45%.
Example – Let’s say your annuity pays you $1,000 a month. Assume that over the next 20 years, inflation rises by 2% every year. In 10 years, your $1,000 monthly payments will buy what $820 buys today. And in 20 years, it will buy $673.
How does adding options affect your annuity payments?
The options you add to your annuity can affect your payment amount. This chart illustrates some examples of annuity options, based on a hypothetical deposit of $100,000 in a life annuity, made at age 65. It shows how your income may drop as you add options.
| Annuity option | What it’s designed to do | Sample monthly annuity payment* |
|---|---|---|
| Straight life (no options) | Provides you with income for life | $536 |
| Life plus 5-year guarantee | Provides you with income for life Guarantees 60 payments to your estate if you die within the first 5 year of your contract | $531 |
| Life plus 10-year guarantee | Provides you with income for life Guarantees 120 payments to your estate if you die within the first 10 years of your contract | $515 |
| Life plus joint-and-last-survivor | Provides income for life for you and your spouse Payments stop after both of you die | $435 |
*These calculations assume an investment of $100,000 in non-registered funds, made by a male aged 65.
Compare annuity rates
Once you buy an annuity, your regular payments are locked in. You can’t change them for any reason. Your regular payments are locked in. It’s worth shopping around to compare annuity rates.
Five tips to consider when buying an annuity
The timing of your annuity purchase can make a difference to the payment amounts you’ll receive. Consider these five tips on how to manage your annuity purchase.
- Try to avoid buying too young – or leaving it too late
In general, the older you are, the more annuity income you get for the same amount of money. This is because someone who is 75 likely won’t live to get as many payments as someone 10 years younger. At the same time, don’t delay too long before buying an annuity. Many companies do not sell annuities to people over the age of 80.
- If you can, buy when interest rates are higher
If you buy an annuity when interest rates are higher, you’ll get more income for the same amount of money. So it may be worth it to wait for interest rates to rise before you buy. Or you may want to stagger your annuity purchases over a few years. This reduces the risk of putting all your money into an annuity when rates are low.
If interest rates are low, it may be worth it to wait until they rise before you buy an annuity. That way, you’ll get more income for the same amount of money.
- Pay only for the options you need
The more options you add, the lower your payments will be. Buy only the options that meet your specific needs. For example, if you have no dependents, it may be better to buy a basic annuity, which will give you the highest income. If you have life insurance, you may not need a joint-and-last-survivor life annuity.
- Don’t pass up options you need just to get higher payments
Your regular payment amount is important. But it’s just as important to get the options you need. For example, if you don’t have many other sources of retirement income, adding the indexing option can make sure your income keeps up with inflation. If you don’t, you could find that your payments will buy a lot less as the years go by.
- Avoid putting all your savings into an annuity
There is always a certain amount of risk associated with putting all your savings into just one type of financial product. Consider how you would respond if you needed extra cash quickly, such as for a medical emergency? You can’t get your savings out once you buy the annuity and you can’t change your payments.
Remember
Once you buy an annuity, you can’t get your savings out. And your annuity payments are locked in. You can’t change them for any reason.
Summary
An annuity provides guaranteed income for a set period of time or for the rest of your life. When buying an annuity, shop around to compare annuity rates. Or you may want to ask an annuity broker to find the best deal for you. Keep in mind:
- Every option you buy lowers the payments you receive from your annuity. Make sure you understand exactly how much.
- Be aware of the fees associated with buying an annuity.
- If you can, buy an annuity when interest rates are higher. You’ll get more income for the same amount of money.
