What is a life annuity?
A life annuity is a financial product provided only by life insurance companies. Only a life annuity guarantees that your income will continue no matter how long you live. After deciding how much lump sum will be used to purchase this kind of annuity, the purchaser can expect to receive a level monthly, quarterly, semi-annually or annual income for the rest of his or her life. This insurance contract guarantees income consisting of interest and a return of principal. If the purchaser lives long enough, eventually all capital invested is returned, nevertheless, the same level payments continue for as long as the purchaser is alive. A life annuity can also be purchased to provide lifetime payments for couples. Upon the death of one or the other, payments continue for the life of the survivor.
It is recommended that you only use the portion of your savings to buy your annuity that you need to cover retirement expenses . When you purchase a life annuity, you are assured of receiving a guaranteed income for the rest of your life regardless of what happens in the investment markets. There may be some merit in laddering annuity purchases, buying one every couple of years, with the hope of eventually obtaining higher returns.
What is an Insured Annuity?
This is a life annuity with 0 years guarantee period along with a permanent life insurance policy with the same amount of death benefit as the capital used to purchase the annuity. This works best if the person making this purchase is a non-smoker in good health and the annuity is purchased with non-registered funds. This combination of guaranteed non-registered life annuity with 0 years guarantee period provides optimum lifetime income, along with a life insurance policy assures that the full value of the annuity will 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. It's imperative that the life insurance is purchased first to make certain that this part of the equation is completed and is cost effective.
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. 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 a Cash Back Annuity?
Only a handfull of Canadian insurance companies offer this type of annuity. A cash back annuity guarantees to pay out all of the capital used to purchase it, whether the annuitant is alive or dead. This type of annuity provides less monthly income than a regular annuity because the insurance company is obligated to at least pay out the amount of money used to purchase the annuity. The income continues for the life of the annuitant even after all the capital has been paid out. This type of annuity simply provides the peace of mind that no money is left on the table. Should the annuitant die before all of the capital has been paid out, the remaining capital is paid to a named beneficiary, either in a lump sum or continuing payments.
What is an Indexed Annuity?
Canadian 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, payments increase annually according to a set percentage that the annuitant has chosen up to 5 percent.
What is a Canadian Variable Annuity with Guaranteed Lifetime Income?
This type of annuity has an investment component that is open to market fluxuation and will rise and fall in value with changing market conditions. Market value of this type of annuity is not protected nor guaranteed. For a small extra fee, some insurance companies offer variable annuities which will provide you with monthly pay outs guaranteed not to fall below a locked-in value for the rest of your life. So, while investment value could drop to serious levels, protected pay out values are guaranteed for the life of the annuitant. RRSP or RRIF [registered] money is well structured in such a plan.
What is a Canadian Deferred Annuity?
This type of annuity is purchased now but defers payments until a specific time in the future and then provides a higher amount of guaranteed income for life. Should the annuitant die before receiving the first payment, the capital used to purchase the annuity is returned as a death benefit.
What is a Term Certain Annuity or Fixed Term Annuity?
A Term Certain Annuity or a Fixed Term Annuity is the same. After deciding how much lump sum will be used to purchase this kind of annuity, the purchaser can expect to receive a level monthly, quarterly, semi-annually or annual income for a fixed number of years. The longer the number of years, the less the payment. This insurance contract guarantees income consisting of interest and a return of principal. At the end of the term chosen, all capital invested is returned.
What is an impaired Annuity?
It is possible to obtain a better annuity payout if you have a shorter life expectancy than the average. Such people may not have a life threatening illness but instead have probably experienced some illness, hazardous working conditions or lifestyle issues that are likely to have had a negative effect on their longevity. Impaired annuities can pay an annuity income that is significantly higher than the standard annuity rates paid to healthy people. Criteria for consideration varies from insurance company to insurance company.
Why is the meaning of a guaranteed period in an annuity?
Life annuities pay a specified amount, at a specified frequency for a person's lifetime. Fixed term annuities pay out all capital used to purchase them plus interest for a specific length of time. This means that all capital and interest would be paid out over this period and the Term Certain would be completed. In the case of a Life Annuity which has payments guaranteed for the life of the annuitant, the guaranteed period has another meaning. If you purchase a single life annuity with a 0 year guarantee, you will generally receive a higher amount of income but if you die after the first payment is received, the annuity dies with you. If you purchase a single life annuity with a 10 year guarantee and you die after the first payment is received, the insurance company issuing the annuity guarantees to pay out a full 10 years worth of payments whether you are alive or dead. Should you die before the 10 year guarantee has been satisfied, the insurance company will pay a death benefit consisting of the remaining payments that should have been made within the 10 year period. This is called a life annuity with guaranteed period. Normally, the longer the guarantee period, the less income the annuity will pay annually in relationship to the amount of capital used to purchase it.
Where do I find sources of annuities?
The following Canadian life insurance companies offer guaranteed annuities in one form or another. Canadian annuities can only be purchased by Canadian citizens, residing in Canada. As a broker, I am contracted with each of these companies and I provide you with information as to where to find the best payout available from these sources when you use my services.
- Assumption Life
- BMO Life Insurance Company
- Canada Life
- Desjardins Financial Security
- Empire Life
- Equitable Life
- Foresters Life
- Industrial Alliance Pacific Life
- La Capitale
- Manulife Financial
- RBC Life
- Sun Life
- Foresters Life
- Wawanesa Life
How do I determine which is the best life insurance company from which to purchase?
Short of calling each and every life insurance company to get quotes which you would need to compare for the best pay out for your age and gender, it is recommended that you use the free services of John Beaton, who will do this on your behalf. An annuity broker is a person licensed to sell annuities for more than one insurance company. It is expected from the very nature of the service that the annuity broker will be unbiased in his or her search for the best return for you. John collects specific private information from you and he uses that information to find the best annuity pay out for you. Pressure from individual insurance companies to purchase their annuity product is avoided. Best annuity rates for you are based on your age, gender, sometimes health and market conditions at the time. The best source for your annuity will change from day to day, month to month.
Why should I use an annuity broker for an annuity purchase?
By using the free services of a broker you are able to compare plans and rates from leading insurers quickly and efficiently. When you start looking for an annuity, you will find that the pay outs vary from insurance company to insurance company. 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 interest rates
- your age, gender and the age and gender of your joint annuitant if any.
- the expense and mortality experience of each particular Canadian insurance company
The difference in annuity pay outs can be significant. Therefore it is vital to shop the market. You want to get the best return for your dollar.
How does a joint annuity work?
A joint life annuity provides income for the primary annuitant of the policy and, after that person dies - income for 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.
John Beaton - Canadian Annuity Broker
An annuitant who purchases a joint life annuity can set up the annuity so that payments stay the same after his or her death or decrease by a certain percentage, up to 50 per cent, 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 increased while both spouses are alive and 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.
If you have worked for the same company for many years and have a company backed registered pension plan, the pay out vehicle is usually a guaranteed life annuity issued by a life insurance company. It is likely that you will be asked to discuss the form of your retirement income with your spouse, if you have one. The reason for this is that government legislation provides for protection of the spouse. There is provision for the spouse to sign off on the working spouse's pension plan but this means giving up any claim to future benefits. Under normal conditions, there would be a discussion with the spouse as to whether the annuity should be a non-reducing or a reducing payment. It doesn't hurt to bring an annuity broker into this discussion.
Is there an overriding guarantee that backs up my annuity payments?
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.
All life insurance companies authorized to sell annuities 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 up to $2,000 per month in annuity income or 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
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