What is a life annuity?
Canadian Life Pay Annuities are only issued by Canadian Life Insurance companies. A life annuity is an insurance contract which 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 period of time or for 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 in the event that their life insurance company should become 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 honoured. 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 $2000 per month with each insurance company. If your income from your annuity exceeds $2000 per month, the protection is limited to 85%.
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 per cent 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 making the decision 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 life time 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, a 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 own 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 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 which 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 recieving the annuity payments dies within the guaranted 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 in order to receive the best payout and you 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 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 really 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. In order 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.