What is a Life Annuity?

Canadian Life Pay Annuities are only issued by Canadian Life Insurance companies. A life annuity is an insurance contract that traditionally provides an income for the rest of a person’s life. An annuity is like a life insurance policy in reverse. The purchaser gives the life insurance company a lump sum of money and the life insurance company pays the purchaser a guaranteed regular income, either monthly, quarterly, semi-annually or annually for life.

What is an Annuitant?

An Annuitant is the person during whose life an annuity is payable.

What is a joint annuity?

A joint life annuity provides income for the primary annuitant of the policy and – after that person dies – income for the lifetime of the spouse if the spouse is still alive. This option ensures that income continues until both the primary annuitant and the secondary annuitant [spouse] die. The purchaser gives the life insurance company a lump sum of money and the life insurance company creates an annuity contract that pays the purchaser a guaranteed regular income, either monthly, quarterly, semi-annually or annually for the requested time or life.

An annuitant who purchases a joint-life annuity can set up their annuity so that payments remain the same or decrease by a certain percentage in one of the following situations:

• If the primary annuitant dies first
• If the secondary annuitant dies first
• If either annuitant dies, regardless of which one it is

The result of choosing to decrease income in any of the above choices is that initial income is somewhat increased while both spouses are alive, and upon the death of one annuitant, the survivor gets less for the remainder of their life. Many people decide to have the same income continue to the survivor when one of the annuitants dies. It is completely a personal choice.

What is Assuris?

Assuris is a not-for-profit organization that protects Canadian annuity policyholders if their life insurance company becomes insolvent. Their role is to protect policyholders by minimizing loss of benefits and ensuring a quick transfer of their policies to a solvent company where their benefits will continue to be honored. Assuris is funded by the life insurance industry and endorsed by the Canadian government. If you are a Canadian citizen or resident, and you purchased a product from a member life insurance company in Canada, you are protected by Assuris. Your annuity income is protected up to $5000 per month with each insurance company. If your income from your annuity exceeds $5000 per month, the protection is limited to 90%.

All life insurance companies authorized to sell in Canada are required, by the federal, provincial, and territorial regulators, to become members of Assuris. Members cannot terminate their membership as long as they are licensed to write business in Canada or have any in-force business in Canada.

If your life insurance company fails, your policies will be transferred to a solvent company. Assuris guarantees that you will retain at least 85 percent of the insurance benefits you were promised. Your deposit-type products will also be transferred to a solvent company. Deposit-type products include accumulation annuities. The key to Assuris protection is that it is applied to all benefits of a similar type. If you have more than one policy with the failed company, you will need to add together all similar benefits before applying the Assuris protection. The Assuris website can be found at www.assuris.ca.

Why Shouldn’t I just cash in my lump sum registered retirement savings [RRSP] when I want?

In Canada, up until you reach the year in which you become 71 years of age, you can simply de-register part or all of any of your registered savings accounts and pay the appropriate tax on what you have withdrawn in the year in which you have withdrawn it. You can take as much or little as you want until your registered funds are depleted. If you are a person who has diligently saved over a lifetime in anticipation of retirement, you may have developed personal pride in the amount of savings you have accumulated. Sometimes it is not easy to make the transition from saving to spending these funds, particularly if you are already living somewhat comfortably on existing income.

However, Canadian government legislation dictates that all RRSP savings must be collapsed by the end of the year in which you become 71 years of age. The only choices you have, are to roll a lump sum of all or part of your registered savings into one or more of the following:

• a Registered Retirement Income Fund [RRIF], where a legislated minimum percentage of income has to be withdrawn per year until funds in that plan are fully depleted, usually before or around age 90. Because investment monitoring must continue for this kind of plan, any income losses could result in this kind of plan being depleted too soon.
• a Registered Canadian Term Certain Annuity payable to your age 90.
• a Registered Canadian Life Annuity that pays you for the rest of your life.
• a Registered Canadian Joint Life Annuity that pays you and your spouse for the rest of your lives.

I’m 71 years of age. Is now a good time to purchase a life annuity?

Life annuity payouts have been declining over the past several years and some retirees have been holding off deciding to buy. The expectation that interest rates would rise and annuity rates would rise also has not happened. The truth is that these retirees would have likely been much farther ahead by now in comparison to the low returns that have been earned over the last few years from fixed-income investments. If you are reluctant to put all your eggs in one basket, then use part of your retirement funds to buy a life annuity now and buy another one a few years later. The goal is to protect your savings so that you develop a guaranteed lifetime income.

I’m getting ready to turn my RRSP into either an annuity or a RRIF [registered retirement income fund]. Which would be best?

While you can purchase an annuity at any age, government rules dictate that you must roll any registered savings into a RRIF by the end of the year in which you turn age 71. Since the capital in your RRIF starts to diminish as soon as you make your first withdrawal at age 72, and increases as you get older, there is some value in using some of your RRIF capital to purchase a life annuity. You would therefore end up with at least two retirement sources, an RRIF that is running out of capital and a life annuity that produces the same guaranteed income for the rest of your life.

What is a Canadian Annuity Broker?

A Canadian annuity broker is a person licensed in specific Canadian provinces to sell annuities for more than one insurance company. The broker uses the information that you provide to find the best annuity for you. John Beaton, for instance, is licensed to sell Canadian annuities in the provinces of British Columbia, Alberta, and Ontario. A Canadian Annuity broker shops for the best purchase price or lifetime payout for you to make certain that you are getting the best return for your money. The best annuity purchase for you is based on your age, gender, health, and market conditions at the time. Since annuity values change from day to day, you need expert help to determine the best source and the best time to purchase. John Beaton represents your interests by shopping for the best price and payout for your circumstances.

I’m a Canadian citizen residing outside of Canada. Can I purchase a Canadian Annuity?

Yes, but you can only purchase registered Canadian annuities with registered Canadian funds that you have located in Canada. You need to travel to Canada in person to do this. The resulting annuity payouts will be deposited into a Canadian Bank account. The insurance company will not deposit annuity payments into a foreign bank account.

Why should I shop for an annuity?

You don’t need to shop around for the best annuity. You can do what you might do when you are buying something like a new car or a new television set. You can simply buy what you see and what you like without shopping around or you might compare prices before you decide to buy. As annuity providers, life insurance companies offer the same kinds of annuities at different costs. If you simply buy the first annuity that is offered to you, you might pay too much. On the other hand, you can obtain a printed quote from an annuity broker that shows you the life insurance companies that offer annuities and compares their offerings.

Each insurer calculates their annuity rates using the following criteria:

• The amount of money you want to spend to purchase your annuity.
• The type of annuity you want to buy.
• Current Canadian long-term bond rates
• Your age, gender, and the age and gender of your joint annuitant if any.
• Individual insurance company current expense and mortality experiences.
• Canadian life expectancy tables.

The difference in lifetime payouts can be significant. Therefore it is vital to shop the market. You want to get the best return for your dollar. Ask John Beaton to prepare a comparison of Canadian annuity payouts for you today. You will be able to see for yourself the best rates of highly rated Canadian annuity providers.

Can my spouse and I combine our RRSPs or our RRIFs to purchase a registered joint life annuity?

No, the registered money you have each accumulated is considered registered in your name only so you would each have to purchase your own separate joint life annuity.

Can registered and non-registered money be combined in an annuity?

No, an annuity is either registered or non-registered.

I have a LRIF and a RRIF. Can I combine money from each to purchase an annuity?

No, they are subject to their own rules and regulations and cannot be combined into one annuity, although they may be segregated as to their status in a single annuity contract.

What kind of information will be required from me to purchase a Canadian Annuity?

• Your Canadian Social Insurance Number [SIN]
• Your Canadian Residential Address
• Cheque from your Canadian Bank Account for non-registered funds or for registered funds, a copy of your last registered statement of account.
• A copy of your Canadian Government Issue Photo ID such as a Canadian Passport or Canadian Drivers Picture ID.

Canadian Life Insurance Companies are very sensitive about the potential of criminals using Canadian Annuities to launder proceeds of non-registered money that might originate from criminal activities. You may therefore expect additional questions to verify the origin of your non-registered lump sum of money that you want to use to purchase an annuity.

What is a Guaranteed Period?

An annuity can be purchased with a guaranteed payout period ranging from 0 years to many years in the future. What this means is that if the person who is receiving the annuity payments dies within the guaranteed period, their beneficiary will continue to receive the payments until the end of the guaranteed period. Generally, the longer the guarantee period you choose, the lower your annuity payments will be. Should you purchase an annuity with a 0 guarantee to receive the best payout and die after receiving the first payment, there is no death benefit and no return of funds.

What is a Back To Back Annuity:

This term is used to refer to the simultaneous issue of a non-registered guaranteed life annuity with a 0 guarantee period and a corresponding life insurance policy [usually whole life or term to 100] from the same life insurance company. The practice at the time that back-to-back was a popular term also resulted in the insurance company involved giving special treatment to the issue of the life insurance component of the back-to-back. This meant that applicants who would normally not be able to qualify for the insurance were qualified anyway. After scrutinization by Federal authorities, the practice was stopped. Today, insurance companies distance themselves from the term, and in fact, some insurance companies selling annuities do not support the idea at all of life insurance supporting any aspect of the annuities they sell. Those companies that continue the idea of annuities backed by life insurance now call the practice Insured Annuities. The annuity and accompanying life insurance are commonly purchased from different sources.

What is an Insured Annuity?

This is an annuity that is purchased with a 0-year guarantee so that the death of the annuitant stops any further annuity payments. A permanent life insurance policy is also purchased on the life of the annuitant. The death benefit of the life insurance would be the same as the amount that was used to purchase the annuity. This combination of guaranteed life annuity provides the highest payout of all types of annuities, along with a guaranteed life insurance policy assures that the full value of the annuity would be paid tax-free through the life insurance policy to the annuitant’s surviving beneficiaries. In effect, the person entering into this kind of life-insured annuity plan would receive annuity income for the rest of his/her life, and upon that person’s death, a tax-free death benefit from the life insurance would be paid to the surviving beneficiaries.

Insuring a life annuity in this manner is an excellent way to provide guaranteed tax-free funds to surviving beneficiaries. The application for the annuity and the application for the life insurance are separate transactions and usually applied for through different life insurance companies so that there is no suspicion of preferential treatment given to the life insurance application. Application for the life insurance policy is usually done first to make certain that the proposed annuitant does qualify for life insurance coverage. Without the life insurance part of the equation, this plan will not work.

What is an Indexed Annuity?

life insurance companies offer indexed guaranteed life pay annuities that start with payments that are lower than a regular life pay annuity but instead of the payments remaining the same throughout the annuitant’s lifetime, the initial payment is somewhat less and at the end of the first year of payments, payouts increase annually according to a set percentage that the annuitant has chosen. Maximum indexing is set a 5% but not all insurance companies offer this much.

I’m retiring from my company pension plan. Is a life annuity a good option?

When a person retires from an employer with a registered pension plan in place, there is usually an offer of a stream of retirement income for the retiree and his spouse. For the pension plan to generate more income, there is an option to exclude the spouse, if she signs off on having any claims against the pension funds. It would be prudent to discuss the company pension options, first with the human resources department of your company before retirement and second, with an annuity broker like John Beaton to determine the best guaranteed life annuities available on the market. Compare the results so that the best retirement option is clear. Do not withdraw a lump sum of registered money before discussing the consequences with a knowledgeable person. For this purpose, you may call John Beaton toll-free at 1-800-667-8818 Pacific Time Zone for a free consultation.

How Do Canadian Insurance Companies Calculate Their Annuity Payouts?

There are several considerations used by annuity underwriters to determine how much they will pay to the person who is purchasing an annuity from their particular insurance company.

1. The lump sum amount that the purchaser provides for the purchase. There are lower limits and upper limits set by each insurance company. The lower limit is usually in the range of $10,000 to $15,000. [We will only deal with clients with a minimum of $50,000] The upper limit can be as much as unlimited millions of dollars but most major Canadian insurance companies have an upper limit of $2,000,000 and some $1,000,000. The average query that we receive is usually in the range of $100,000 to $500,000.
2. The age and gender of the person[s] who wants an income from a life pay annuity. Federal mortality tables outline the average life expectancy of males and females in Canada. These tables are periodically updated to reflect the health of this nation. The current prediction is that females live longer than males therefore if a male and a female of the same age purchase a life pay annuity, the female can expect to receive smaller payments because of her longer life expectancy.
3. The specific mortality credits accumulated by the insurance company that is quoting a payout rate. Mortality credits are accumulated by the fact that some annuitants do not live as long as mortality tables predict so the insurance company does not have to pay out as much for that person. Of course, some annuitants live longer so the insurance company must continue to pay for as long as that person is alive. If the insurance company ends up with an excess amount of mortality credits, they are used as part of the calculation for new purchases.
4. The health of the person who is going to received life time payments from a life pay annuity. If there is a health issue that might contribute to a shortened life span, the insurance company could do what they call an age enhancement to in effect make that person older for calculation purposes. This would result in an impaired life annuity with an increased level of payment.

Where Can I Buy An Annuity in British Columbia?

Canadian insurance companies are the only sources from which Canadians can purchase life pay annuities. However, annuities cannot be purchased directly from the insurance companies. Annuities can only be purchased through a licensed life insurance agent or an insurance broker.

It’s important to know if you are dealing with an agent of an insurance company or an insurance broker who deals with multiple insurance companies. It’s unlikely that an insurance agent can offer advice on any insurance company’s products other than the company he/she is working for. He/she is essentially a captive agent who is only selling products for his/her employer. An insurance broker on the other hand, is able to represent many insurance companies and is therefore able to compare annuity payouts to find the best annuity for you.

For more than 35 years John Beaton has been a licensed insurance/annuity broker in British Columbia. He routinely searches for and compares the best current annuity payouts available in British Columbia.

What are the fundamentals for first-time annuity buyers?

First-time annuity buyers will be introduced to a variety of terms, concepts, and options throughout their purchasing process. The following “Fundamental Annuity Information for First-Time Buyers” section is created so that you will be more informed, prepared, and self-confident about annuities before you book an appointment with me. If you are not yet familiar with concepts such as “registered and non-registered funds”, “single premium immediate annuities”, and “term certain annuities”, it would be beneficial to continue reading.

What are registered and unregistered funds?

All retirees need a longevity strategy that focuses on 5 key areas: Income, lifestyle, housing, healthcare, and caregiving. Purchasing a life annuity can answer these problems.
Annuity payments are a series of regular payments that provide you with a steady guaranteed income just like a pension would. With a life annuity, you will receive payments for as long as you live. Life payment annuities, income annuities, and immediate annuities are also called Single Premium Immediate Annuities (SPIAs).

1. Income for Life: When you purchase a life annuity, you don’t have to worry about outliving your money. Your payments are guaranteed for as long as you live.
2. Income Security: No market or interest rate fluctuations will decrease the income you receive each month.
3. No Management Decisions: There are no more investment decisions to make once you’ve purchased your annuity.
4. Estate Planning Benefits: In the event of your death, your payments can be guaranteed to be received by your surviving spouse or other beneficiaries for a determined time. In addition, your money goes directly to your beneficiary and does not have to go through probate.

Registered and Non-Registered Funds

Annuities can be purchased using non-registered or registered funds. Registered annuities are annuities purchased with funds from a registered retirement savings plan (RRSP), spousal RRSP, registered retirement income fund (RRIF), spousal RRIF, locked-in plan, or pension plan. Every dollar received from this type of annuity is taxable as income in the year it is received. If you have a registered retirement savings plan and a spousal registered retirement savings plan, you cannot join these two sources of funds to purchase one registered annuity. These different kinds of funds cannot be commingled. You would need to purchase two separate annuities, one for each source of funds.

A non-registered annuity is any annuity purchased from out-of-pocket funds and not tax sheltered by the government.

Annuity Types

Life annuities are suitable for people who can’t or don’t want to manage their money in their later years. A life annuity can help make sure you won’t run out of money during your lifetime.

• A single-life annuity guarantees a monthly income for one individual for the duration of their life.
• A joint life annuity pays a guaranteed income while you and your spouse are alive and continues to pay that income to the surviving spouse upon the death of their partner.
• Term certain annuities provide a level of income for only a certain period. Ex. You are 60 years of age and purchase a five-year term certain annuity while you wait for your Canada Pension Plan money to start at age 65.
• If in poor health, you may qualify for an impaired (enhanced/enriched) annuity, which considers a shortened life expectancy

More On Joint Life Annuities
If you purchase a joint life annuity, you can choose to reduce income payments by a specified percentage of the original payment [usually up to 50%] when either you or the joint annuitant dies. Doing this can increase the original payment. If you have added a guarantee period to your joint life annuity, the death of one of the joint annuitants does not trigger the reduction of future payments until the end of the guarantee period.

More On Term Certain Annuities

Term certain annuities are designed to provide a level of income for only a certain period. This kind of annuity could be useful if you retire before the government Old Age Security (OAS) and Canada Pension Plan (CPP) retirement income starts. For instance, if you retire at age 50, you could purchase a non-registered term certain annuity to provide the same income you expect from OAS and CPP at age 65, to cover the period from age 50 to 65. A term certain annuity payable for 15 years would fit your need in this instance.

Please note that a term certain annuity can only be purchased with non-registered funds, registered retirement saving plan funds, or registered retirement income funds. You cannot purchase a registered term certain annuity with a registered pension plan or locked-in funds. Additionally, a registered term certain annuity purchased with registered funds can be payable only to an annuitant’s age 90.

Guarantee Period

You can buy a life annuity with or without a guarantee period. A guarantee period is a duration where your income is guaranteed to be paid, even if you die. This means that your beneficiaries would receive the income that would otherwise have gone to you.

Important Annuity Information

You must have the following requirements to purchase an annuity:

• Canadian Social Insurance Number (SIN)
• Canadian address (not a PO Box office number)
• Canadian bank account.
• Canadian government-issued photo I.D.

It is suggested that you get an independent annuity broker

It is very important that you get a competent annuity broker. While all life insurance agents are licensed to sell annuities, in fact very few ever make an annuity sale. Agents represent only one company and will only be able to give you a quote for that company. Independent annuity brokers such as John Beaton represent all the companies and will provide you with premium quotes.

You need to decide on annuity options

Discuss with your annuity broker what options you should consider.

• Should your life annuity be single or joint?
• Should the annuity have a guarantee of a certain number of years?
• Should payments start now or be deferred to a future date?

Remember that most life annuities are bought as pension plans. In other words, it is to replace a pension that would normally be paid by your former employer. With that in mind, the purchase of an annuity is to meet your needs and that of your spouse. The needs of beneficiaries should be secondary.

Get annuity quotes

You should see quotes from all companies who will quote on annuities. Your broker, John Beaton, can help you in this regard.

Recurring Payment Options

Life pay annuities are payable for the rest of your life, no matter how long you live. With a life annuity, you can choose to have monthly, quarterly, semi-annual, or annual payments.

When You Can Buy

Use your retirement savings to buy an annuity at any time — just before retirement, at retirement, or at any time during retirement. And you can convert some or all your savings into an annuity.

Annuity Protection

Your annuity income is 100% protected up to $2000 per month with each life insurance company. If your income exceeds $2000 per month, the protection is limited to 85%. For annuities purchased with non-registered funds, only the interest component of the payment is taxable. A joint life annuity pays a guaranteed income while you and your spouse are alive and after your death, continue paying that income to the surviving spouse.

Are you waiting too long to take a retirement income?

Waiting does not make sense to me, and it shouldn’t to you either. If you decide to buy a house, you take your money out of the bank and now you don’t have the money; you have the house. The same thinking applies to retirement income; you convert your cash to income.

Some retirement advisors recommend that you should defer your retirement income – registered or not – for as long as possible. I’ve seen articles suggesting you wait until ages 75 and 80. How do you know you’ll be alive to enjoy the money you saved? These suggestions to wait until after your life expectancy are questionable at best. It’s possible that you and/or your spouse could develop age-related illnesses. Income from GICs and other investments are not based on your age; only annuity incomes are age-related and will pay you more with less tax.