An annuitant may decide to add one or more options to a term certain annuity or life annuity. However, he or she must make sure to choose these options at the time the annuity is purchased, since it is not possible to make changes after the first payment is made.
Indexation
This option may be added to a term certain annuity or life annuity. Indexing means that the income generated for the annuitant by his or her annuity can be readjusted annually, based on the indexation rate chosen at the time of purchase. Indexation rates generally vary between 1% and 4%. The indexation rate remains the same for the duration of the annuity payments, and is not related to the inflation rate.
Guaranteed payment term
This option is only applicable to a life annuity, since a term certain annuity is established for a set period. Guaranteed payment periods are usually offered for terms of 5 to 25 years, regardless of whether or not the annuity is registered. However, in the case of a prescribed annuity, the guaranteed payment term ceases once the annuitant reaches 90 years of age.
Example (with guaranteed payment term):
Mary, age 68, purchases a life annuity with a guaranteed payment term of 15 years.
- She dies at the age of 72, four years after purchasing her annuity. Since the guaranteed payment term is 15 years, her annuity will continue to be paid to her beneficiary over the next 11 years.
- If Mary dies at the age of 88, her annuity payments will immediately cease, since the guaranteed payment term expired five years earlier.
Example (with no guaranteed payment term):
Mary, age 68, purchases a life annuity which comprises no guaranteed payment term. This annuity will cease on Mary's death, regardless of her age.
Reversibility
This option is only applicable to a life annuity since a joint and survivor annuity is a life annuity that is paid to the annuitant for life and, upon death, to any living spouse. At the time the annuity is purchased, the annuitant establishes the percentage of the annuity that his or her spouse will receive after his or her death. As a general rule, when the funds comprising an annuity come from an employer retirement plan, the annuity must be reversible to the surviving spouse, unless the spouse decides otherwise.
Example:
Mary, age 68, purchases a joint and last survivor annuity at 75% on her spouse, Paul, who is 70 years of age at the time. Mary dies at the age of 79. Paul, then 81 years
of age, will receive 75% of the annuity paid to Mary until his death.
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Note: This text is intended for information purposes only. In no event should it be considered as professional tax or legal advice.
Updated: January 2008
