What is Life Annuity?
A life annuity is an insurance product that features a predetermined periodic payout amount until the death of the annuitant. They are commonly used to provide for a guaranteed income in retirement that cannot be outlived. Typically, the annuitant pays into the annuity on a periodic basis when he or she is still working. However, annuitants may also buy the annuity product in one large, lump-sum purchase, usually at retirement. Once funded and enacted, the annuity makes periodic (usually monthly) payouts to the annuitant, providing a reliable source of income. When a triggering event (such as death) occurs, the periodic payments from the annuity usually cease, though they may continue to pay out depending on the option the annuity buyer chooses.
Benefits of Life Annuity
In return for a lump-sum premium, you can choose to receive a stream of payments to suit your needs. It’s ideal if you’re not able to or don’t want to actively manage your money or pay fees for someone else to do it for you.
- Avoid outliving your money
Not knowing how long you’ll live is a retirement income planning issue. Life annuities provide payments for life and can form the cornerstone of an effective retirement plan.
- Easily customized
There are many plans, terms and variations available, depending on your unique situation and circumstances. Annuities can be combined with growth-oriented products to form part of a diversified investment plan to mitigate risk.
- Your choice of payments
The income stream for an annuity can start immediately or be deferred to a pre-determined date, depending on your needs and preferences.
- Speedy estate settlement
You can appoint a beneficiary to avoid probate and undue delays in settling your estate and benefit from potential creditor protection.
- A stable income stream
If you don’t like the turbulence and volatility of stock markets, annuities can provide regular income to fund a major expense (e.g., mortgage, education, vacation, or other ongoing expenses like property taxes, utility bills, etc.).
- Minimize effects of inflation
Indexed income payments help offset inflation (maximum of 4% for registered assets and 6% for non-registered assets).
- More favourable taxation
Non-registered annuity payments are a blend of interest and return of capital. A prescribed annuity is taxed more favourably than a non-registered fixed-income product. These payments can help minimize claw back of applicable government benefits since only part of the annuity payment is considered net income for tax purposes. Non-registered annuities also help level out tax charges and yield more after-tax income up front.
- Longevity insurance and market risk
An annuity can guarantee a stable and predictable income for life regardless of market conditions or interest rate fluctuations.
- Inflation protection
An annuity can be indexed so the income increases by a set amount each year to help a client’s income keep up with inflation. The downside to this, however, is that the annuity will not qualify for prescribed taxation.
- Guaranteeing income for a spouse
A Joint and Survivor annuity is designed to cover the lives of two individuals – a primary annuitant and secondary annuitant (usually spouses). Income is generally paid to the primary annuitant and, upon his or her death; the secondary annuitant continues to receive the income for the rest of their lifetime.
- Tax reduction
For those age 65 and over, taxable income from an annuity generally qualifies for the annual $2,000 Pension Income Tax Credit