Types of Annuities
Annuities are financial products that provide a guaranteed stream of income for a set period of time or for the rest of the annuitant’s life. An annuitant is the person who receives the income payments from an annuity. Annuities are quite often used as a retirement income tool and are offered by life insurance companies in Canada.
We are quite frequently asked by clients how often annuity rates change. In simple terms, annuity rates are the rates of return that the annuitant will receive on their investment, which in turn impacts the amount that the annuitant will receive from the insurance company.
It’s important to understand that annuity rates are subject to change at anytime, sometimes even multiple times in one day. This is because they are influenced by many different factors and these factors can change rapidly. Some of these factors include interest rates, inflation, mortality, investment performance and the age and health of the annuitant.
In this blog post, we’ll explore how often annuity rates change in Canada and what factors can cause them to fluctuate.
Interest Rates
Interest rates play a critical role in determining annuity payout rates which includes both short-term and long-term interest rates. Higher interest rates result in higher annuity payout rates, while lower interest rates lead to lower annuity rates. The Bank of Canada changes the overnight interest rate eight times per year which in turn impacts long-term interest rates. These changes made by the Bank of Canada have a direct impact on how insurance companies adjust annuity rates.
Financial Markets
Insurance companies hold a wide variety of investments which include stocks, bonds, real estate and more. The daily performance of an insurance companies investment portfolio impact the returns generated by annuities. Financial markets play a large role in how often insurance companies will make changes to annuity payout rates as well as how often they will make these changes. Large shifts in the market may influence an insurance company to make quick, unexpected changes to their annuity payout rates. If there is a recession or a financial crisis, annuity rates may drop as insurance companies seek to protect themselves from risk.
Mortality Rates
Death is an important factor when insurance companies are pricing annuity payout rates. The longer the life expectancy of male and females, the more annuity payments insurance companies are expected to pay out. Life insurance companies understand mortality rates inside and out as they use them to price life insurance and annuity products. The changes in mortality rates definitely impacts annuity payout rates.
Demographics
Annuity payout rates are also influenced by demographic factors such as the age and health of the annuitant looking to purchase an annuity. In general, older annuitants receive higher payout rates because their life expectancy is shorter, and the payments spread over a shorter period of time. As a result, the longer you wait, you will receive a higher payment, but you will also receive fewer payments.
Similarly, if the annuitant has a health condition that is likely to shorten their life expectancy, insurance companies may offer them an “impaired annuity” which would provide them with a higher payment because of a shortened life expectancy. Your health conditions will determine if you qualify for an impaired annuity or not.
Conclusion
So, while there is no one-size-fits-all answer to how often annuity rates change in Canada, it’s safe to say that they can change frequently, and that the frequency of rate changes will vary based on a variety of factors. Do not be surprised if you compare two identical annuity quotes one day from each other and receive two different payout amounts.
If you are considering purchasing an annuity, it’s important to do your research and to understand how the rate of return will be calculated and how it may change over time.
Please reach out to us at Life Annuites.com to discuss your annuity options further. We can also run customized quotes from the top life insurance companies in Canada for you at no cost.