Can an annuity help me? What you need to know before you buy
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.
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.
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:
Canadians who are retired or near retirement like the predictable income and low risk that annuities promise.
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.
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:
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.
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.
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.
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:
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:
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.