Managing one’s savings by investing or having a representative do it isn’t necessarily the best choice for everyone. There’s another option: an annuity.
What is an annuity?
An annuity allows you to receive a regular amount over a fixed period of time or for the duration of your retirement. To receive the payments, you have to buy the annuity. For example, at 60 years old, you buy an annuity costing $250,000, and it will pay you a fixed amount of $1,000 per month for the rest of your life.
How is the purchase price and the amount paid out by the annuity determined?
The purchase price of the annuity is based on several factors:
- The payment amounts you want to receive
The higher the payments, the higher the purchase price of the annuity.
- Interest rates
The higher interest rates are when you buy your annuity, the higher the payments you’ll receive. Why? Because your insurance company will make a bigger profit when it invests the money. Conversely, the lower interest rates are when you buy your annuity, the lower the payments you’ll receive.
- The duration of the payments
The longer the insurance company anticipates having to make payments to you, the more expensive the annuity will be. Therefore, the older you are when you buy an annuity, the less it will cost you.
Based on the same logic, if you have a specific amount to buy your annuity, the payments you receive will be higher if:
- interest rates are high
- the payments are made over a short period (either because an end date has been determined or because your life expectancy is shorter).
The advantage of an annuity
In most cases, the funds you used to purchase an annuity no longer belong to you. Your money is converted to the series of payments specified in the contract.
The advantage: You don’t need to manage a stock market portfolioA portfolio is a group of various investments made by a person or a company.
For example, an investor’s portfolio can contain shares, bonds, mutual funds, options and other financial instruments. . In addition, no matter whether the market goes up or down, you’ll receive the payments set out in the contract.
What are the main types of annuities?
Here are two types of annuities: An annuity certain pays you a regular amount until a pre-determined date. A life annuity pays you a regular amount until your death.
Annuity certain (also known as a guaranteed or fixed annuity)
This annuity pays you a set amount over a pre-determined period of time. For example, you can buy an annuity that will pay you $500 a month for 20 years.
The two main advantages of an annuity certain are that:
- you’ll receive payments, regardless of market fluctuations
- if you pass away, your heirs will receive the annuity payments
This annuity may or may not be indexedIncome is indexed if it is regularly adjusted to fully or partially offset cost of living increases. .
As the cost of living increases, you’ll need more money to maintain the same standard of living. To deal with this problem, you can buy an indexed annuity. The amount of your payments is based on:
- a cost of living index
- or a percentage determined when you buy your annuity.
A life annuity pays you a regular amount and is guaranteed until your death.
There are several options available with a life annuity. Note that these options will increase the purchase price of your annuity.
- Option: survivor clause
When you buy a life annuity, you’ll receive regular income until your death. The survivor clause guarantees that, upon your death, your spouse will be paid your annuity or a portion of it while alive.
- Option: guarantee
This option ensures that you’ll receive payments for a set number of years. For example, let's say you buy a life annuity guaranteed for 10 years.
- If you die during the first 10 years of the annuity payment period, your beneficiaries will continue to receive payments until the end of the tenth year.
- If you live more than 10 years, you’ll receive payments while you’re alive.
How many years do you expect to live?
No one knows what age they’ll die at. Some people have fragile health all their lives but die in old age. Others who have always been in excellent health are struck down much younger.
If you die shortly after acquiring an annuity, you’ll have received very few payments. The survivor and guarantee options allow someone close to you to receive the payments after your death.End of the warning
What happens if your insurance company can’t pay your annuity?
Assuris is an organization that protects the public against insurance company bankruptcies. If your insurance company can no longer pay your annuity, Assuris will pay you either the full amount or a portion of it.
- If your annuity payment is $2,000 per month or less ($24,000 per year or less): Your payments are fully covered.
- If your annuity payment is more than $2,000 per month: Assuris covers up to 85% of your payment amount, with a minimum of $2,000 per month.
To be covered by Assuris, your insurance company must be a member. This is likely the case, since all insurers who sell annuities are required to meet this obligation. To find out more about Assuris or to confirm that an insurer is a member, visit the Assuris This link will open in a new window website.
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Documentation and tools
- Guide to Financial Planning for Retirement – 2017-2018 Edition (pdf - 3 MB)This link will open in a new windowUpdated on 18 August 2017 This is the 2017-2018 edition of the Guide to Financial Planning for Retirement. The partners who make up the Question Retraite group have combined their expertise to make your financial planning for retirement pleasant and uncomplicated.
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