Life Annuity Definition: Guaranteed Income You Cannot Outlive
A life annuity is a contract in which an insurer converts a lump sum of capital into a series of income payments that continue for the rest of the annuitant's life, no matter how long that is.
In plain terms: you hand the insurance company money, and it promises to pay you until you die. The insurer takes on the longevity risk — the risk of living longer than expected — which is exactly what makes an annuity the opposite of life insurance. Life insurance protects against dying too soon; a life annuity protects against living too long.
Why it matters on the LLQP exam
Annuities sit inside the Segregated Funds and Annuities module, and the exam loves the vocabulary:
- Annuitant — the person whose life the payments are based on (not necessarily the owner or the payee).
- Straight life annuity — payments stop at death. Highest monthly income, zero estate value.
- Guaranteed period — payments continue to a beneficiary for a set number of years even if the annuitant dies early (e.g. life with 10-year guarantee). Longer guarantees mean lower payments.
- Indexed annuity — payments rise with inflation, so they start lower than a level annuity.
The classic exam trap: the client who wants the highest guaranteed income gets the straight life annuity with no guarantee period. Every guarantee or refund feature you add reduces the monthly payment.
Payments from a prescribed annuity bought with non-registered money are taxed on the interest portion only, while registered funds (RRSP/RRIF rollovers) make every payment fully taxable — another favourite test point.
Example question
Which annuity option produces the highest monthly income for a 65-year-old male annuitant?
- Life annuity with a 20-year guaranteed period
- Life annuity with a 10-year guaranteed period
- Straight life annuity with no guarantee
- Joint-and-last-survivor annuity
Answer: C — every guarantee shifts risk back to the insurer, so payments shrink; no guarantee means maximum income.
Keep building this vocabulary with deferred annuity and joint life annuity, then review the full segregated funds hub.