Why should you buy an annuity?

By Ivon T Hughes
wallet

A life annuity can help you from running out of money

Ask any retiree or pre-retiree what their biggest financial worry is, and more than 60 per cent of Canadians will tell you, they are concerned they’ll outlive their retirement savings! At that stage of life, the prospect of stock market risk is scary for almost everyone. Safety and security of capital is paramount. But the rates available in GIC’s and money markets still languish at rock-bottom levels. And the idea of trying to eke out an acceptable standard of living -- and then making that income last for decades into retirement -- is indeed daunting.

Meanwhile, according to data from Statistics Canada, the life expectancy at birth for men was 79.6 years. Women are living even longer: the life expectancy at birth for women was 83.8 years and may still increase! This means that today’s crop of retirees has a much more challenging task in front of them than prior generations.

Retirees in 1970 only had to make their money last a decade or so. Yet, today’s retirees may have to stretch their limited retirement resources for as long as three and even four decades! Those with very young spouses must stretch even more—and they must do so, even despite the handicap of very low interest rates, especially compared to the returns on capital prior generations enjoyed.

That’s why annuities are so important.

When it comes to solving the problem of longevity risk, annuities have no equal.

life annuity whats that

Life Annuity, what's that?

Annuities are among the most valuable financial products on the market today. Paradoxically, they are also among the financial products most commonly misunderstood, even among financial professionals.

A life annuity is a contract with an insurance company that provides a guaranteed income for your lifetime. The annuity is the only financial product available on the market that offers lifetime income with the protection and security of a written guarantee. You provide a lump sum of capital, called premium, and in return, a life insurance company guarantees you a stream of income payments for life and sometimes for a minimum period according to the specific terms in the contract.

If you add a guarantee period, payments will continue for that minimum period of time, regardless of whether you are alive. This feature may be useful if your premium money is non-registered and you want the income to continue until a child or grandchild reaches a certain age for example.

One of the biggest advantages of the annuity contract is the way annuity owners can customize pay-outs to suit their own individual and family circumstances. Some of the ways you customise your contract are:

  • You choose a pay-out guaranteeing a certain amount of income for your lifetime. You can generate an estimate as to what that income amount will be by using this online tool ( www.lifeannuities.com/calculator.html).
  • You can create a personal pension for yourself from your savings, even if you don’t qualify for one from your job.
  • You guarantee an income for as long as either you or your spouse is still alive.
  • You can guarantee pay-outs to last until a family member is old enough to have graduated from college, or reaches the age of majority.
  • You can guarantee pay-outs to last until a home mortgage is paid off.
  • You can use RRSP’s as a tax shelter to defer income taxes until you actually use the money in retirement, with the purchase of an annuity.

An Annuity gives you guaranteed monthly income for life.

That’s the Holy Grail of personal finance for millions of retirees. And for those who are diligent in saving throughout their working lives, it’s absolutely attainable. But retirees still make too many mistakes that stop them short of reaching their goals.

  • They don’t set aside enough ‘guaranteed’ money.
  • They expose too much money to stock market risk – which always seems to clobber them at the worst possible time.
  • They expose too much money to interest rate risk – and are forced to take an unexpected income cut when interest rates fall.
  • Too many assets are exposed to inflation risk.
  • They have too much money riding on a single industry, product or stock.
  • They don’t cover their monthly expenses with ‘safe’ money they can count on.
  • Too much money is subject to current income and capital gains tax.

There are a lot of ways to make and lose money in all kinds of markets. But only ONE is a proven income generator through all kinds of markets, all kinds of economies, year in and year out, since ancient times: Annuities.

You need to be prepared for all types of emergencies, such as drastic changes in health and housing. Your retirement is about the things you have possibly waited all your life to do, quite apart from the everyday tasks.

Whether you saved money in a registered plan such as an RRSP or with non- registered money, preferring to pay taxes up front, congratulations are in order. Your foresight and discipline was exemplary. And now is the time to enjoy the fruits of your patience and your labour.

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You don’t have to risk losing money.

And, you shouldn't. This is one of the benefits of buying an annuity because Life Annuities are 100% Guaranteed.

Feature Guarantees that are offered by Annuities include,

Life Income

  • You can never outlive your retirement income.
  • Joint life annuities provide lifetime income for a spouse or partner also.

Income protection guarantee

  • 100% income protection: Assuris.com guarantees a policyholder up to $2000 per month income with each company.
  • 85% income protection: If the amount of the monthly payment exceeds $2000, the 85% protection is applied. Thus, if the income is $3000, then 85% of that amount or $2550 is covered.

Note: Maximizing protection.

Use different annuity companies: The prime annuitant (you) should consider splitting capital between the highest paying companies to gain the 100% insurance coverage. Apply for different annuitants: If the non-registered monies can be shared, consideration should be given to applying for policies, with different prime annuitants.

Note: Mutual funds, stocks or bonds do not come with these protections from Assuris or any other entity. While they do offer the potential for capital growth, only annuities come with an income guarantee, in writing, and only annuities and insurance products come with protection from Assuris.

Who Can Benefit From a Life Annuity?

Life annuities offer unique advantages over other types of saving vehicles. Especially for certain categories of people, such as

  • Everyone with Heirs or Inheritors Upon death any benefits will be redirected to your beneficiary, avoiding unnecessary delays, probate and legal costs. And when you designate certain family members such as your spouse, child, grandchild or parent as beneficiary, the funds could be protected from creditors. (Annuities can be issued for - Ages 18 to 90 for registered annuities and Ages 0 to 115 for non-registered annuities).
  • Everyone who wants to make sure that they always have money for essential needs A key part of retirement income planning is ensuring that essential living expenses like groceries, rent and utilities are always covered, no matter what. Income from a life annuity can supplement other sources of income, but annuities are the only financial products on the market that offer a lifetime income on a guaranteed basis. These make annuities a wonderful choice for ensuring that you don’t ever have to worry about essential living expenses like groceries, rent and utilities.
  • Everyone who wants to avoid needless complexity One of the most appealing things about Life annuities is that they require no on-going management; the policy owner simply places money into a life annuity for guaranteed income payments for his or her lifetime. Reducing needless complexity is always beneficial. The security and protections of annuities may help you simplify your life by doing things like closing unwanted bank accounts and cancelling unused credit cards. Simplifying your life is just plain smart.
  • Everyone who doesn't want to worry about inflation and market fluctuations You can elect to index your payment so that you keep pace with a fixed inflation rate, say of 2%. However, as the payments start with a lower amount, attention must be paid to health factors. You need to consider whether you and/or spouse will be able to enjoy the money, even later in life.
  • The peace of mind gained from knowing that everything is settled and guaranteed may be a new and very welcome feeling, as your income will never again be affected by interest rates, the stock market or mutual fund returns. Money will continue to be deposited in your bank account for the rest of your lives and until any guarantee period expires.

Why Choose an Annuity?

There are many reasons to choose an annuity, not the least of which are because of the sheer customisability of a life annuity. The reasons to choose an annuity are many and tangible.

  • Simplicity. With a lump-sum premium on a straight life annuity, you receive a stream of payments, usually monthly, for as long as you live – guaranteed. If you want a safe, reliable, guaranteed income and don't want to have to worry about managing a pool of investments, this is the way to go.
  • Longevity. The risk of outliving your income is terrifying. The only guaranteed solution, though, is the annuity! Life annuities provide payments for you and your spouse and form the cornerstone of a guaranteed income.
  • Flexibility. There are many plans, terms and variations of annuities available. You can mix single life and joint life annuities to get the terms of pay-out you want, and you can use either registered or non-registered funds to buy them.
  • Payments. You can have your stream of income start immediately or you can defer it to a later date of your choosing depending on the company you select.
  • Estate settlement. A beneficiary can avoid probate, while potentially benefiting from the powerful creditor protection features of annuities.
  • More income. Non-registered annuity payments are a blend of interest and return of capital. Only the interest portion is taxable, so overall taxes on a given level of income are lower than with other income sources. This means actual after-tax incomes are often higher, all other things being equal.
  • Guaranteeing two incomes. A joint and survivor annuity covers the lives of two individuals – a primary annuitant and secondary annuitant. These are usually spouses, of course, but you may designate another individual if you choose – including a child or grandchild!
  • No maintenance. There is no maintenance to be done or fees to be paid as with mutual funds. The money will continue to be deposited in your bank account for the rest of your lives and until any guarantee period expires.
  • Gifting potential. The joint and survivor annuity is a powerful concept for gifting – your grandchild could potentially receive a gift with love from Grandma or Grandpa every year for many decades – long after you are gone. Note: You can only use this strategy with a non-registered annuity. See the section on joint life annuities below.
  • Income tax breaks. For those age 65 and over, taxable income from an annuity qualifies for the annual $2,000 Pension Income Tax Credit.
  • Increased Income. If either of you have an illness whereby your life expectancy is shortened, you may be able to receive a higher monthly income.
  • Peace of mind. Your income will never again be affected by interest rates, the stock market or mutual fund returns.
  • Superior guaranteed income. Annuities have far better income than a guaranteed investment contract (GIC). Furthermore, annuity income is guaranteed and insured. In contrast, income from mutual funds is never guaranteed.

Advantages of Life Annuities

There are many advantages and benefits when purchasing an annuity.

  • They are ideal for providing a regular income stream for retirement.
  • Payments will continue, unchanged, for life or the designated term regardless of interest rate fluctuations.
  • As part of a diversified retirement income plan, annuities reduce risk and add stability and reliability. They are ideal for retirement income.
  • Annuities create personal pension plans for those without pension plans.
  • Annuities can be integral to the estate planning process. The combination of benefit guarantees, appointment of beneficiaries to avoid probate, if any, and the creditor protection features make them valuable tools.
  • Suitable for investors who can’t or don’t want to actively manage part of or all of their savings.
  • They are ideal hedges against longevity risk: No one knows how long they will live. With a life annuity, you never have to worry about outliving your money. Further, joint life annuities can also guarantee an income for a surviving spouse.
  • Life Annuities pay more than GICs for the same dollar.
  • There are no investment or management decisions. You can spend every penny of your current income without worrying about future pay cheques.
  • Assuris provides 100% insurance coverage up to $2,000 per month per company.
  • Prescribed annuities are tax efficient compared to other income investment options.

Types And Strategies For Life Annuities

There are different types of life annuities available and more can be created by the annuitant by blending different strategies.

For a very simple example,suppose you and your spouse have $200k in non registered funds. If one spouse is somewhat older, $100k could be placed in a single life annuity with a long term guarantee of say, 30 years if the numbers are beneficial. Thus the income would be higher than just placing all the funds into a joint annuity at the start.

Or if one partner has an illness where the lifespan is shortened, application should be made for an impaired annuity, whereby the payments are increased as compensation.

Or if the annuitant wishes to provide for children or grandchildren, there are ways to provide for them in the long term after your death.

By wielding your economic power to obtain the highest income possible for you and your family. You are using life annuities in the way they were intended to help.

Using life annuities to guarantee income for you and your beneficiaries is just plain smart.

Convert your registered or non registered funds into guaranteed income

Using a life annuity converts RRSPs and other registered funds or non-registered funds into guaranteed life income that you cannot outlive.

At a time when Canadians are living longer than ever before, it is also more important than ever before that incomes last for life.

Do not let the opportunity pass you by!

Ivon T Hughes

About the Author

Ivon T. Hughes

Ivon T Hughes is a leading expert in life annuities in Canada. His website LifeAnnuities.com is a recognized authority on annuities. He's also an established insurance and investment broker, through The Hughes Trustco Group since 1972. Recently, he's been redefining how annuities are sold in Canada.

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