A life annuity is a long-term investment, issued by an insurance company and is designed to help protect you from the risk of outliving your income. Through annuitization, purchase payment (your premium) is converted into periodic payments that lasts for life.
The word Annuity generally has three meanings and connotations. First it is a legal term, then an insurance term, and finally a connotation used when conversing with the consumer.
The Legal Definition
The legal definition of Annuity is a fixed sum payable at specified intervals, especially annually, over a period, such as the annuity for life, or in perpetuity, in return for a premium paid in instalments or in a single payment. [as implied in the policy contract]
The Insurance Definition
The Insurance Definition [in day to day conversation] often splits the two main components of the legal definition into
- An accumulation annuity where the essence of the product is to save and invest(or Accumulate) for (usually) retirement. To comply with the legal definition there is a payout date, which is no later than age 105. These plans are usually Segregated funds, (mutual fund emulations) or GIAs (which are GIC emulations). These type of Annuities can be RRSPs or non RRSPs (open investments). Accumulation annuities are sometimes called deferred annuities as the income portion is deferred to a later date in the future.
- The second format is the Income Annuity or Immediate Annuity which means that the income portion of the Legal Annuity begins right away. The premium is always a one time or Single Premium at the start of the contract. The immediate annuity can be a
- RRIF (a conversion of an RRSP [the accumulation annuity], a Pension fund, if allowed by the plan and before income payments of the pension commenced; or
- Non registered, if sources of funds are not registered in some format.
The Consumer Definition
- The Consumer Definition is the third format and interpret to mean and that is a form of Life Annuity like a Pension income.
An annuity is the simplest retirement income option. In exchange for a sum of money, an annuity from an Insurance Company provides you with a stream of income payments.
The size of the income payments you receive are made up of interest and principal and are determined based on:
- Your age (and in certain cases, your spouse's age), for life annuities;
- Current interest rates;
- The length of time the payments are guaranteed; and
- The amount of money used to purchase the annuity.
As mentioned the term "Annuity" is a legal term (specifically, under the Insurance Act) a Financial term and a Consumer understood term. There are a number of financial instruments that take the legal form of an annuity and this can at times be confusing if the term is not interpreted in context of its use.
A Steady Stream of Payments to You
Select the life income option and you will enjoy a steady retirement income from your pension funds along with the security that you will never outlive your money. And since the insurance company is managing your money, you won't have to worry about market fluctuations or other investment management decisions. You can relax while we do the work.
Payments Guaranteed by The Insurance Company
Your income payments are guaranteed by the insurance company regardless of the ongoing economic conditions. The insurance company manages the money used to purchase your annuity so you're not burdened with any investment decisions.
For immediate annuities, like a RRIF segregated fund, annuity payments will be taxed as income in the year that they are received. For non-registered funds, only the interest portion of each payment is taxed each year.
Two types of life annuities are available.
- Life annuity, no guarantee – A life annuity payable for your lifetime and ceasing upon death.
- Life annuity, 5 to15 year income payment guarantee – A life annuity pays an income for your lifetime or for the guarantee period, whichever is longer. If you die before the completion of the guaranteed income payments, payment may continue to your beneficiaries or the current value of the remaining guaranteed payments will be paid to your appointed beneficiary. The life annuity is offered with guaranteed monthly income payments for anywhere from 5 to 15 years.
If the annuity is funded by RRSP or RRIF funds, the guarantee period cannot extend beyond age 90. If the annuity is funded by pension funds, the guarantee period cannot exceed 15 years.
Joint and Last Survivor Annuities
Income payments will continue until the later of your death and the death of your spouse. At that time, any guaranteed income payments which remain will be paid to the beneficiary, or if none is designated, then to the estate.
If you are purchasing an annuity with funds accumulated under a registered pension plan and you have a spouse, you are required to purchase a joint and last survivor annuity. This requirement may be waived, in some cases, with the signed consent of your spouse.
Continuing in full
A life annuity payable for your lifetime and, upon your death, continuing for the lifetime of your spouse. You may add a guaranteed term to this option (5, 10, or 15 years). If all of the guaranteed payments have not been made upon both of your deaths, the balance will be paid to the beneficiary, or if none exists, to the estate.
Reducing on the death of the annuitant
A life annuity payable for your lifetime, which upon your death, will reduce by a specified percentage (usually 50%, 40% or 30%) and continue to your spouse for his/her lifetime. You may add a guaranteed term to this plan (5, 10 or 15 years).
Reducing on the first death
A life annuity payable for the duration of you and your spouse's lifetime, which, upon the death of either you or your spouse, will reduce by a specified percentage and continue to the survivor throughout his/her lifetime. You may optionally, add a guaranteed term to this plan (5, 10 or 15 years).
Annuity with a Term Certain
A Term Certain Annuity has no life element to it. It will pay out the specified periodic payment for the duration of the agreed upon term to a beneficiary in the event of the death of the annuitant.
An annuity certain guarantees, and pays out, a set number of income payments. For annuities funded by RRSPs or RRIFs, the number of payments is equal to 90, less your age in whole years at the purchase date. If you die before reaching age 90, the balance will be paid to your beneficiary, or if there is no designated beneficiary, then to the estate.
You can also have the option of basing the number of income payments on your spouse's age. The payments would continue until your spouse is 90.
For non-registered funds the number of income payments can extend beyond the age of 90.
Creating a guaranteed income stream
A payout annuity might be right for you if you want peace of mind in retirement. It is designed to convert your savings into a guaranteed income stream for either:
- a set period of time (term certain annuity), or
- your entire life (life annuity)
For many people in Ontario, a payout annuity is an easy, worry-free answer to retirement income needs and is the best way to maximize guaranteed income.
This is how payout annuities work
- You save for your retirement. You want the money you have saved to provide an income for as long as you live, or at least a certain period of time (like 10 or 20 years).
- So, you decide to buy a payout annuity facilitated by CSIA(we have access to the best rates).
- The insurance company calculates how much your income will receive be based on factors such as:
- long term interest rates, and
- how long the average person your age will live
- CSIA compares the different payment amounts from all competing insurance companies and picks the best one for you.
- The insurance company sends you money for the rest of your life (or the period you specify) much like a pension cheque during retirement life.
You can buy different types of annuities:
- Life annuity – provides income payments for as long as you live – usually with a guarantee that they’ll continue to a beneficiary in case you die earlier than expected.
- Joint and last survivor life annuity – income payments for as long as you and your spouse live – payments to the last survivor.
- Term certain annuity – gives a specified number of income payments. If you die before all the specified payments have been made, a death benefit is paid to a beneficiary.
- Some may qualify for a Prescribed Annuity.
Payout annuity can fit into your Life Plan
These are some reasons why you might want to buy a payout annuity, rather than a RRIF or LIF:
- You don’t want to risk outliving your savings (Longevity Risk)
- You want guaranteed payments, to pay ongoing fixed expenses
- You don’t want to make any more investment decisions – simplicity
Payout annuities provide an income for life or for a specific period of time. As part of a financial plan they can play a valuable role, providing a guaranteed income in your later years. You may have other income products contributing to your overall cash flow – payout annuities will give a predictable and guaranteed amount. Remember – a payout annuity does not have to be your entire nest egg. It can be the safety portion of your retirement income, guaranteeing you can pay for basic living expenses. This will allow you to be a bit more aggressive with you remaining investment portfolio, if you wish. ~
The following Video help explain some of these concepts.
Page Views: N/A