Learning about investing is rather like taking a course in an unfamiliar subject. It requires a lot of study and a willingness to embrace unfamiliar ideas. Annuities are especially challenging because they incorporate a number of concepts and options that rise from their roots in the insurance industry. To stretch the analogy, it's like taking your course in an unfamiliar language. The concepts are similar, but the terminology can be a struggle. Individual companies also use different terminology for the same product, so one firm's "non-life contingent annuity" is another's term-certain annuity.
Annuities have two basic functions. The first is growing your money through investments, using either the issuer's in-house investment portfolio or a set of other investments that you choose. The second function is turning that investment and its profits into an income you can draw on when you need it, usually in retirement. Your investment can grow without taxation as long as you leave it in the annuity, and you'll pay taxes only on the returns when you begin to draw an income. On that day, you can structure your income in a number of ways.
It's possible to take your entire annuity as a single payment, but that can trigger a heavy tax penalty. More often the funds are taken as a regular income, which can be paid monthly, quarterly or yearly. Depending on the options you choose, the issuing company will continue those payments for the rest of your life or the life of a second person, or simply pay for a predetermined period. Conservative investors often buy annuities for the security of a lifetime income, guaranteed by the issuing company. However, in some cases it makes sense to take payments for a specified period.
Non-Life Contingent Annuities
Annuities with a specified end date are called non-life contingent annuities, since their payment period doesn't extend for the rest of your life. The same products are also called temporary annuities, period-certain annuities or term-certain annuities by various companies. They have certain advantages over life annuities. Most life annuities stop with your death, while most term-certain annuities will continue making payments to your specified beneficiary. They also generate higher payments from a given investment, since the issuing company knows exactly how long they'll have to pay. They have a number of practical uses.
Uses of Non-Life Contingent Annuities
One of the most common uses of a non-life contingent annuity is to provide temporary income as your retirement plans mature. For example, your pension plan might offer a modest temporary annuity income between your retirement date and the date your pension benefits begin. Individual investors can do much the same thing, timing a temporary annuity to end when they become eligible for Social Security or on the date they must begin drawing income from an IRA. They're also a way to provide income to an adult child who will gain access to funds from a trust at a specific age.
Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.