This article explores the argument for life annuities.

Introduction

If you’ve found a job you love, that’s great. But even if you have, you don’t want to have to work every single day of your life. And that means doing your homework so you can fix yourself up with a nice, cushy retirement. Besides, by the time retirement comes along, your kids may need help with the child care of your grandchildren.

Preparing for retirement

Preparing for retirement is actually easier than you might think. But that doesn’t mean it’s too early to start thinking about it. Here in Canada, we’re lucky - we can retire at 60 years of age if we want. That’s a lot sooner than many other countries. But that also means we need to be better prepared financially.

Aside from paying off all your debt and building a bit of savings, there are two main, and more significant ways to financially prepare for retirement. And they’re not mutually exclusive. You can subscribe to a pension plan and you can buy a life annuity.

Pension Plan vs Annuity

At this point, before we go any further, it’s important to reiterate what we said earlier. Pension plans are not mutually exclusive, which means you can have both, and you can supplement your pension income with an income from an annuity.

And at the time of writing, the maximum monthly amount you get (at 65) on CPP is little over $1,100. Doesn’t sound very promising does it? Especially if you’ve previously been enjoying a much better lifestyle.

Likewise, if you haven’t had such a grand lifestyle during your working life, your financial prospects with CPP are weaker still. This is because the amount you receive each month is based on your average earnings throughout your working life

Of course the CPP is by no means the only pension plan around in Canada, we’re just using this one as an example for the sake of simplicity.

So let’s look at your options more closely.

Most people already know what a pension plan is. You basically pay into a pension plan, and money grows over time. Then, when you hit retirement, you receive a regular income that’s drawn from the pension plan.

But an annuity is a different kettle of fish. The main difference between an annuity and a pension, is how you pay for it. With a pension, it’s a very slow and ongoing process, you build the pension up over time, usually making contributions for every single working month. And that can be a drain. Especially at a time when you may have a lot of other outgoings, like a big mortgage.

With a retirement annuity on the other hand, you can buy yourself a healthy retirement income in one bulk payment.

This is great because it means that if you happen to receive money from an elderly relative, or you receive a golden parachute at the end of your job, or you come into money some other way, then you can buy yourself an additional retirement income by way of an annuity.

There are different types of retirement annuities you can get. These are life annuities, joint life annuities, fixed term annuities and variable annuities. For the purpose of this article, we’re going to concentrate on life annuities, and what they can offer.

What is a life annuity?

So, a life annuity, for those who don’t already know, is a contract you can buy in order to receive a guaranteed regular retirement income, not for a set period of time, but right up until the day you pass away.

This is in stark contrast to fixed term annuities, which as the name suggests are for a fixed period of time.

The most notable difference between life annuities and other retirement income plans is that you are likely to see a much bigger payout over time with a life annuity.

Now you may well be wondering exactly how that works. We’ll answer as many of your questions here as we can, and direct you to other sources where more appropriate.

If you still haven’t quite got your head around what a life annuity is, you can take a look at our other article, entitled What is a Life Annuity.

How do life annuities work?

For the answer to this question, we’re going to direct you to our other, very informative article entitled How Does an Annuity Work, which provides a full explanation.

Who are life annuities for?

Life annuities are for everybody.

If you find yourself single, you can buy a single life annuity, or if you have a partner, then you can buy a joint life annuity if you prefer. With a joint life annuity, when one of you passes, the other annuitant will continue to receive regular retirement income payments from the annuity.

Many people tend to buy themselves a life annuity when they hit their retirement age. This is because they may have received a lump sum as part of their retirement or pension package. However, if you have the money for a life annuity before you hit retirement age, then there’s no reason not to buy sooner.

And that leads nicely onto our next question.

How much is a life annuity?

The cost of an annuity depends on how much income you wish to receive from it each month (or other time period).

Different insurance companies offer different life annuity packages. And how much money you make from a life annuity depends on how long you (and your spouse if applicable) live for, and it depends on how much the company's investments grow.

There’s a really good example of how much money you can expect to make with a life annuity on the Canadian government’s own web page. We really recommend that you check it out, it’s really straightforward and clear.

You can either approach a relevant insurance company for a quote, or you can speak with a qualified life annuity advisor.

• Click Here To Find Out How Much An Annuity Will Cost

Benefits of a life annuity

There are three main benefits to a life annuity. First, as you may have already gathered at this point, there’s the amazing financial security. And there’s also deferred payments and death benefits.

If you are in good health, there’s every reason to believe that you can continue to live a good, long life. And the longer that you live with a life annuity, the more money you will receive.

If you look at the example on this link, you will see that if you buy a life annuity for $100,000, with income payments starting at age 65, then you will have made that money back by age 82, and if you live to age 90, you’ll have made an additional $50,000. Impressive hey?

The amount you are paid per installment, and how frequently those payments are, is agreed between yourself and the insurer at the time of purchase. But while such amounts are determined by conditions in the economy at the time of the purchase, the agreed income amount will not change with future market fluctuations. Very reassuring.

But better yet, you can also consider buying an inflation linked life annuity. This way your income payments will rise in line with inflation!

When you buy a life annuity, you don’t have to start receiving payments straight away as soon as you retire. And this is good because if you already have some kind of pension plan in place, then you can arrange for the annuity income to kick in, right when and if your pension plan decreases.

With regards to the death benefits, you can arrange that any remaining guaranteed payments by the life annuity at the time of your passing, can be passed on to a beneficiary of your own choosing.

There’s a lot that your beneficiary could potentially do with those payments or that lump sum, whether it’s to pay toward property or to pay for your funeral.

The other type of death benefit with a life annuity is one we’ve already alluded to. With a joint or survivor annuity, your regular annuity income can instead be paid to a named spouse or other beneficiary for the remainder of their life.

Wrap up - Should you buy a life annuity?

We think life annuities are great. You get a guaranteed income for the rest of your life, plus other benefits besides.

If you’re still a little unsure, then you may also want to check out our other article entitled Do I have to Buy an Annuity.

• Click Here To Find Out How Much An Annuity Will Cost