In Canada, a life annuity is a financial product that provides the annuitant a guaranteed stream of income for their entire life. It is typically purchased with a lump sum payment and is often used as a way to supplement retirement income or to provide a reliable income stream for those who may have a longer life expectancy.
A frequent question that we receive from clients is, what happens to a life annuity when I pass away? This depends on a variety of factors which include the type of annuity, the guarantee period of the annuity and whether it is joint life or single life.
Type of Annuity
In Canada, there are two main types of life annuities: a single life annuity and a joint life annuity. A single life annuity provides income for the life of one annuitant, while a joint life annuity provides income for the life of two annuitants.
If the annuity is a single life annuity, the income stream will cease upon the death of the annuitant. There are no residual payments or death benefits with type of annuity unless there is a guarantee period added to the annuity (see below for more information on guarantee periods).
On the other hand, if the annuity is a joint life annuity, the income stream will continue for the life of the surviving annuitant. In other words, the annuity will keep paying out until the death of the 2nd annuitant (it does not stop after the 1st death).
It is important to note that joint life annuities can be structured in different ways. Depending on the joint life annuity contract, upon the death of the 1st annuitant, the surviving annuitant will continue to receive annuity payments either at a reduced amount (e.g. 70% of the original payment) or the full payment. It depends on how the annuity contract was originally set up.
Time of Death
When life annuities are purchased, the owner of the contract must choose a date for when the income starts. The funds that are used to purchase the annuity are received by the insurance company before the income start date. For example, you may purchase an annuity on October 1st and want the income payments to start on January 1st of the following year. If the annuitant passes away before the income starts on January 1st, most annuity contracts are structured so that the funds that were used to purchase the annuity are returned to the owner or beneficiary of the contract. This provides peace of mind to the owner of the contract knowing that they will not lose their investment in the event that death occurs before they start receiving income payments from the annuity.
A life annuity with a guarantee period provides a guarantee that if the annuitant dies before the end of the guarantee period, the annuity payments that have not been paid out will be paid out to the beneficiary listed on the contract or to the estate if there is no beneficiary.
For example, if a life annuity has a 10 year guarantee period and the annuitant dies after receiving payments for only 4 years, the designated beneficiary will receive the remaining payments that are owing (6 years of payments) to ensure that the 10 year guarantee period is satisfied.
If the annuitant dies after the end of the guarantee period, no further payments will be made. For example, if a life annuity has a 10 year guarantee period and the annuitant dies in year 12 of the annuity, the annuity will be finished and no further payments would be paid out as the 10 year guarantee has been satisfied.
Guarantee periods are a very popular feature that can be added to annuities. It helps protect the initial capital that was used to purchase the annuity as it ensures that a minimum number of payments are guaranteed to pay out in the event of a premature death.
Estate Planning Considerations
For individuals who are considering purchasing a life annuity, it is important to carefully consider the implications of what happens to the annuity at death. This may involve working with a financial advisor or estate planner to develop a comprehensive plan that takes into account factors such as age, health, family circumstances and taxation.
Some individuals may also choose to purchase a life insurance policy to provide additional financial support for their loved ones in the event of their death. Life insurance policies can provide a lump sum, tax free payment to beneficiaries which can help to cover expenses such as funeral costs or outstanding debts.
In Canada, a life annuity can be a valuable tool for those looking to supplement their retirement income or provide a reliable income stream for the duration of their life. However, it is important to structure an annuity properly before purchasing to ensure that your financial goals are taken care of at death.
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.