What is an annuity?
Annuity definition: In the simplest annuity contract, annuitants (individual investors) deposit a lump sum with a life insurance company and then receive regular income for a fixed period or for life. There are many different types of annuities and selecting the right one for you is what we do. After we have performed a needs analysis we shop the market for the best annuity rate available, for the type that you need.
Who is most suited for annuities?
- Investors who can’t or don’t want to actively manage part or all of their capital.
- Investors and pensioners who want guaranteed income that’s eligible for the pension income tax credit and pension splitting according to CRA guidelines.
- Investors who must convert pensions and locked-in RRSP’s to an income stream.
- Anyone concerned about outliving their retirement savings.
- Early retirees who want more income until their OAS begins.
- Anyone who requires annual indexing to offset inflation and preserve capital.
- Beneficiaries and individuals entitled to structured settlements from personal injury insurance claims or death benefits.
- Estate planning.
About annuities - What types of annuities are available?
- Cashable: Applicable to all non-registered accrual payout annuities. This allows annuitants to access cash if an unforeseen urgent need arises or they decide they no longer want to take an income. Annuitants receive all or a portion of the commuted value of the remaining guaranteed payments; if any value remains, payments will be reduced within the guaranteed period. Once the guaranteed period ends, full payments will be restored.
- Cash refund guaranteee: Applicable to life and joint life annuities. If an annuitant dies before an amount equal to the original premium is paid out, a cash payment equal to the difference will be paid to the beneficiary.
- Deferred annuity: Annuitants selecting guaranteed income on a deferred annuity may also add a return of premium (ROP) option.
- Guaranteed Term: Payments are guaranteed for a specific term, i.e., 5 years.
- Indexing: To help offset inflation, income payments can increase at a fixed annual rate, up to 4% for registered funds and 6% for non-registered funds.
- Individual Variable Rate Annuity (see segregated funds).
- Impaired: Annuitants with severe health problems receive higher payments, all other factors being equal, than healthy annuitants. It’s opposite to life insurance in that respect.
- Prescribed (non-registered only): Level income tax reporting over the life of the annuity which creates higher after tax yields verses comparable, risk free assets.
- Personal Insured Annuity: Beneficiaries receive the initial lump sum tax free on the death of the annuitant, bypassing probate.
Annuities explained - Sample illustration
Supposing Sam, a 65 year old non-smoker, decides to purchase a $100,000 single life annuity from tax paid capital in his savings account. Sam’s immediate monthly payments will continue for life but will cease at his death with nothing payable to his estate. Annuity rates are constantly changing in tandem with the long term investment grade corporate bond rates. However, as of July 1st, 2011 Sam would receive $634.49 per month.
Sam’s wife Anne is also 65 and a non-smoker. She would receive $569.31 per month from the same single life annuity. This is because females are expected to live longer and therefore Life Insurance companies pay less to females than to males, all other factors being the same.
If Sam and Anne wanted to receive immediate annuity income and leave the $100,000 to their estate or named beneficiaries on the last to die, they would purchase a personal insured annuity which would pay them $400.91 per month ($357.31 per month after tax) for as long as they both live. This annuity income would be eligible for pension splitting and prescribed tax treatment which would allow them to net more after tax than a $100,000 market value portfolio of long duration investment grade bonds currently yielding 5% of fully taxable interest. ($416.67 per month gross and $291.67 per month net)
(NB: The above quotes are valid as of July 1st, 2011 and are subject to change without notice. Both quotes assume a combined Federal and Provincial tax rate of 30%. Personal insured annuities are subject to medical underwriting and the quotes given assume standard non-smoker life insurance rates.)
For a free Annuity Quote and consultation please call 1-877-830-7000 or contact us.