December 19, 2023

Can an annuity help me? What you need to know before you buy

By Paul Moser

Have you heard about an annuity? It can help you get steady income when you retire. But it’s a good idea to find out how annuities work, before you buy one.

Higher interest rates are causing anxiety among homeowners with mortgages and Canadians who need to borrow money. But these higher rates are also generating a renewed interest in payout annuities. New sales for payout annuities increased 25% in 2022, compared to 2021 (Investment Executive).

What is an annuity? It’s a financial product generally offered by a life insurance company – like Sun Life. An annuity provides you with a guaranteed regular income for life or as long as the annuity contract specifies. An annuity helps you cover basic expenses in retirement and may protect you from the risk of outliving your money.

Why buy an annuity? 

Payout annuities provide a constant, guaranteed source of income for as long as the annuitant lives or during the period specified in the contract. (An annuitant is a person on whose life the insurance company calculates the annuity income payments.) There are other important reasons for you to consider buying an annuity:

  • Volatile markets don’t affect annuity payments. The ups and downs of market values don’t change the amount of money you’ll receive. 
  • People who buy annuities in a higher-interest environment may enjoy higher payouts.
  • You can appoint a beneficiary if your annuity is a term certain annuity or a life annuity with a guaranteed period. A beneficiary is someone who will receive the remaining guaranteed annuity payments or a lump sum after you pass away.

Canadians who are retired or near retirement like the predictable income and low risk that annuities promise.

When’s the best time to buy an annuity?

Low interest rates seem to decrease interest in annuities. Interestingly, buying an annuity when interest rates are low isn’t always a bad idea.

That’s because short-term rates (like the overnight rate) don’t drive annuity prices. Long-term rates set the returns on the investments that annuity providers use to make the annuity payments.

Even when rates are low, annuities are attractive to a lot of people. That’s because annuities offer a commitment on the part of the financial institution to make regular income payments to the annuitant.

One of the best times to buy an annuity can be when you’re retiring. That’s when you’ll be thinking about changing your RRSPs and other registered savings into retirement income. An annuity can provide guaranteed lifetime income to cover basic living expenses during your retirement.

Types of annuities in Canada

Term certain annuities pay the annuitant a regular income for a period of time. That period can stretch to 10 or 20 years, or it can run until the client reaches a certain age. If the annuitant dies before the term ends, the remaining income payments are made to the beneficiary.

Life annuities provide income guaranteed to continue for the annuitant’s lifetime, no matter how long the annuitant lives. Only life insurance companies can sell life annuities. Here are 4 common types:

1.) Life annuity without a guaranteed period

The financial institution commits to regular payments until the annuitant dies. Payments stop at that time, regardless of when that happens. This annuity calculator will give you an estimate of your guaranteed retirement income with an annuity. Be mindful that if you die after only one payment, income stops with nothing for anyone else.

2.) Life annuity with a guaranteed period

In addition to regular payments during the annuitant’s life, the institution commits to a guaranteed period. If the annuitant dies before that period is over, the beneficiary receives the remaining income payments. Or the beneficiary could choose a lump sum instead. This lump sum equals the current value of all the future guaranteed income payments.

3.) Life annuity with indexing

Income payments rise over time at a fixed rate, compounded each year. These increases are calculated for as long as the annuitant lives. Guaranteed periods are available for these annuities, too.

4.) Joint life annuity

This generally covers the income needs of two annuitants. After one annuitant dies, payments continue to the remaining annuitant until they die. There are various options: 

i. with no guaranteed period,

ii. with a guaranteed period,

iii. with income reducing (which reduces the income payments after one annuitant dies), and

iv. with indexing (which increases income payments each year as long as one annuitant is alive).

In addition to the four main categories above, there are other types of annuities:

Variable annuities (also known as segregated fund products or seg funds)

Only life insurance companies offer segregated fund contracts. Segregated fund products are similar to mutual funds. They’re large pools of money invested in stocks, bonds, or other securities. These funds can have higher fees than mutual funds, depending on the type of fund. Also, the fees may be higher because of the insurance benefits:

  • Maturity and Death Guarantees: protect the value of the premiums you paid at maturity and at death.
  • Beneficiaries: name a person or people to receive a death benefit from your registered or non-registered contracts.
  • Potential creditor protection: depending on the beneficiary you name to receive the money in your segregated fund contract when you die. Creditors may be prevented from taking the funds from your segregated fund contract. Speak to your advisor for details.
  • Guaranteed income options: some segregated fund contracts offer lifetime guaranteed income.

Ask your advisor about annuities, and find out if they’re a good fit for you. An advisor will help you understand the product and how it could help you reach your retirement income goals.

Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada, and Sun Life Financial Trust Inc., all of which are members of the Sun Life group of companies.

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