I will try to keep the technical term to a minimum in this article. It is a sum of money that is paid to an investor that is referred to as the annuitant. When the individual investor is interested in this type of income stream, a lump sum of capital is paid to a financial institution in exchange for a contractual income, normally for the lifetime of the annuitant. This income is often paid out monthly much like a pension. The annuitant can also select a guaranteed payment period to make sure that upon premature death the income payments continue to be made to a beneficiary. Once the life annuity contract is established the annuitant no longer has access to the initial capital amount, one has to be certain that this strategy makes sense for the long term. The monthly income payments can also be structured to increase every year in order to keep up with inflation.
When interest rates are high the annuity income is higher for the same amount of money invested. Life annuities were more popular a decade or two ago when the interest rates were much higher. Investors are more reluctant in purchasing annuities these days as there is always hope for higher rates in the future. Many people have chosen to use the RRIF (Registered Retirement Income Fund) option, in retirement, when they converted their RRSPs to an income. This option does not necessarily produce more income; however, the investor continues to manage the underlying investment within the RRIF and always has access to the capital amount.
It may be a wise strategy to consider more than one source of income in retirement, the life annuity option should be considered as well, in order to provide guaranteed long term retirement income.