There are two phases for a life annuity purchased in Canada.
- The accumulation phase in which you make deposits and earn interest over the years.
- The distribution phase in which insurance company makes life annuity payments until the death of the annuitants named in the contract.
An alternative is a term certain annuity contract so that the distributions in income is over a fixed time period.
The 2 phases of the life annuity combine for an annuity which makes regular payments until death or the end of a guaranteed period if death occurs earlier.
The accumulation phase is well understood by all Canadians, you need to save and invest for your retirement.
But what most people have difficulty with is the distribution phase when they have to decide to switch from accumulating money to using it as income.
And the basis of those fears are that you will run out of money before you die. And that is backed by fears of low interest rates, stock market collapses, thievery and loss of mental control.
And that is why people buy life annuities; a life annuity gives you control even if at some later stage of your life, you are unaware of your capabilities.