Types of Canadian Annuities

Please note that for guaranteed life annuities, payouts are higher for males than they are for females of the same age because mortality tables show that females, on an average, live longer than males and annuity providers expect to have to pay females for a longer period of time. When a male and female of the same age purchase individual life annuities, the male will receive a slightly higher periodic payment than the female because the male’s life expectancy is shorter.

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Term Certain or Fixed Term annuities: This type of annuity can be purchased with a lump sum of money from any Canadian life insurance company. The lump sum can originate from either registered or non-registered sources. Registered term certain annuities can be purchased with registered funds from individual RRSPs, locked-in RRSPs, RRIFs, Pension Plans or Deferred Profit Sharing Plans. The purchaser provides instructions to the insurance company as to how long they want this type of annuity to pay them. All capital used to buy this annuity must be paid out by the insurance company. Once this payment period is over, income payments cease and the annuity contract ends. A person would purchase an annuity like this if a guaranteed income stream was needed for a specific time period. If the annuitant dies before receiving all guaranteed payments, the remaining payments will be paid to a named beneficiary or the estate of the purchaser.

Guaranteed Life annuities: This type of annuity can be purchased with a lump sum of money from any Canadian life insurance company. The lump sum can originate from either registered or non-registered sources. Life annuities are purchased as either single life or joint joint. Single Life annuities pay a periodic income as long as the sole annuitant is alive. Joint Life annuities continue to pay as long as one of the two joint annuitants is alive. Joint annuities can be structured to pay out more money up front by directing that payments reduce after the primary annuitant dies or either annuitant dies. Registered life annuities can be purchased with registered funds from individual RRSPs, locked-in RRSPs, RRIFs, Pension Plans or Deferred Profit Sharing Plans. It is possible that annuitant[s] might outlive the capital used to buy this kind of annuity, as the same payments continue until the annuitant[s] die.

Cash Back Annuities: This type of annuity with a cash back feature is offered by only a limited number of Canadian life insurance companies. This type of annuity can be purchased with a lump sum of money on a single or joint life basis. The source of the lump sum can be either registered or non-registered funds. All capital used to purchase such an annuity is guaranteed to be paid out, either as annuity payments or a death benefit. While this annuity is guaranteed to pay income for a person’s lifetime, should that person die before all capital has been depleated, then the difference between what has already been paid and capital remaining will be paid to a beneficiary in a lump sum. Please note that, even though all capital might eventually be depleted in payments, the annuitant[s] continue to recive the same payments for life.

Insured Annuities: This type of annuity can be purchased from most Canadian life insurance companies. An insured single life annuity is the unique concept of purchasing a life annuity with no guarantee period to generate income for a person’s lifetime. This kind of annuity on its own does not provide any estate benefit but it generally produces the largest amount of monthly income of any of the other forms of life annuities. For estate purposes, the annuitant uses part of the income from the annuity to purchase a permanent life insurance policy, normally for the same amount of the purchase price of the annuity.

The insured single life annuity ensures the annuitant a high after-tax income during his/her lifetime and the insurance protects the annuitant’s capital and provides an estate benefit for his/her spouse or children. The best life insurance component will be obtained by a person who is in good health and who is a non-smoker. It is best to cost out the price of the life insurance and make certain that it is in force before committing to the annuity component. The most benefit is received from a non-registered prescribed annuity because of the regular preferential tax treatment given to the income received. Please be sure that you understand that a 0 year guarantee for the annuity means that the insurance company providing the annuity will not provide any further payments to the annuitant after he or she dies. At the point of death, annuity payments stop and a non-taxable death benefit from the life insurance policy, equal to the cost of the annuity, is paid to a named beneficiary.

Impaired Annuities: This type of annuity is not offered by all Canadian life insurance companies and even those that offer it, have significant differences in calculating the risk. Proof of a diminished life span is required for consideration of this kind of annuity. This is a case where poor health raises the likelyhood of increased life annuity payments because of shortened life expectancy. If you have a health concern, make certain that you reveal it when investigating annuity payouts.

Indexed Annuities: This type of annuity is not offered by all Canadian life insurance companies. Those that do offer it, have different limits that are offered. One insurance company might offer up to 5% annual increase while another might only offer a maximum of 2% annual increase. Essentially, if you add an indexing feature to a guaranteed life pay annuity, the initial payments received, will be reduced. The annual index chosen might result in your annuity taking several years or more of annual increases to get to the same amount of income that you would have started with, if you had not added the indexing feature. My opinion is, that indexing is better for young people. The purchase of such an annuity by an older person might result in that person never living long enough to truly benefit from the indexing feature.

Child Inheritance Annuity: This type of annuity is a tax saving strategy sometimes used on the death of an RRSP owner who has a dependent child or grandchild. RRSP funds of the deceased can be used to purchase a Term Certain annuity payable to the child’s/grandchild’s age 18. Instead of the deceased’s estate taking the hit for the taxation on a lump sum of registered funds, registered annuity payments are then fully taxable to the child/grandchild at their marginal tax rate. This same strategy can be used to protect government disability benefits for a disabled person who could loose those benefits if he or she received a lump sum death benefit.

Variable Annuity: Please note that the following is a general description of how a Canadian variable annuity functions. For a short while, this type of investment was popular in Canada but insurance companies have had to re-design these plans to conform to government reserve requirments so they have become much more complicated. So, this type of annuity is designed in Canada as both for an accumulation of funds and a for a guaranteed lifetime payout of funds. Contributions are invested in Canadian life insurance company segregated funds exposed to market fluxuations. The purchaser can specify their tolerance to investment risk so that appropriate funds can be selected for a tolerance of low, moderate or high risk investing. Eventual payout is at a contractually specified interest rate. This type of Canadian annuity might also be known by Canadians as a Guaranteed Lifetime Withdrawal Plan [GLWB] or a Guaranteed Minimum Lifetime Withdrawal Plan [GMLWB].

Non-registered variable annuity plans are fairly straightforward. A contributor deposits money into a plan either by regular deposit or occasional lump sums. Generally, at the end of December of each year, the insurance company adds a notional bonus to each of their plans if no withdrawals have been made from their plan within that year. This notional bonus varies from insurance company to insurance company and may vary currently to between 0% to 5%. The specified bonus is a contractual part of each plan. Also, it is specified that any gains in the segregated investment part of the plan will automatically be locked in on the anniversary of the purchase date every three years as long as the gains are higher than the last lock-in anniversary date. If the value of the investment part declines then there simply will not be a lock-in of value at the third year anniversary. Bonuses are calculated on the plan locked-in amounts. Eventually guaranteed payouts are also calculated on locked-in amounts.

If this type of annuity is used as a registered plan [RRSP], contributions are limited to the amount each year that the Federal Government says can be contributed to an RRSP and at the end of the year in which the contributor becomes 71 years of age, no further contributions are allowed. During the accumulation phase of a registered plan, regular annual notional bonuses are added to the plan as long as no withdrawals have been made in the year that a bonus is being calculated. At the end of the year in which a contributor becomes age 71, the plan can be converted into a RRIF and no further contributions can be made to the plan. First scheduled withdrawals start in January of the year in which the contributor becomes age 72. Government legistlated minimum RRIF withdrawals continue to be mandatory but contractual lifetime benefits will be paid if they exceed the government limits.

When the capital remaining in the plan has been depleted enough that the minimum RRIF payment is lower than the plan’s contractual payment, then the level contractual payment will be made for the rest of the plan holder’s life even though eventually, capital may have been mostly or completely expended. Note that this variable annuity guarantees a lifetime level payment, no matter that the capital may have reduced to nothing. This is contrary to a normal RRIF with increasing percentage payouts to age 90 as capital decreases dramatically. Having a variable annuity does not preclude a plan holder of such a plan to compare at any time the merits of moving assets to a regular life annuity plan.

 

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