Life annuities are key to retirement planning for many Canadians. They convert lump sums into lifetime income streams. Payment calculations depend on age and interest rates. The Canadian market offers several types: immediate, deferred, fixed, variable, and indexed annuities. Each type has specific advantages. Annuities provide guaranteed lifetime income. They protect against longevity risk. However, they offer limited liquidity. Returns may be lower than other investments. Most annuities cannot be cashed after payments begin. They provide income and peace of mind for life. People approaching retirement should understand key differences. Life annuity pensions protect against outliving savings. Life insurance protects dependents if you die early. Both serve as complementary parts in a complete financial plan.
A life annuity is a financial product that provides guaranteed income payments for the duration of a person’s life. Life annuities are contracts between individuals and insurance companies that convert a lump sum of money into a stream of income. They serve as a reliable source of income and offer Canadian residents financial stability throughout their retirement years. In 2023, fixed-rate annuities achieved record sales in Canada, contributing to the overall growth of the annuity market. According to Mindy Carner, Vice President of Research and Markets at LIMRA, the Canadian life and annuity industry demonstrated remarkable resilience and growth potential despite economic uncertainties. Lifetime annuities provide a retirement paycheque that can help cover basic expenses and maintain your standard of living regardless of market fluctuations.
A life annuity works by converting a lump sum payment into regular income payments that continue until the annuitant’s death. The insurance company calculates payment amounts based on factors including the purchaser’s age, gender, health status, and prevailing interest rates. The annuity owner transfers their capital to an annuity provider (typically a life insurance company) in exchange for guaranteed regular payments. The purchase price determines the amount of annual income or monthly payments you’ll receive throughout the payment period. Group annuity transactions in Canada reached nearly $8 billion in 2023, up from just over $2 billion in 2014, showing significant growth in this market segment. Based on insights from Brent Simmons, Senior Managing Director of Defined Benefit Solutions at Sun Life, group annuities have become a crucial risk management tool for pension plan sponsors looking to secure their members’ retirement benefits. The annuitization phase begins once payments start, following an optional accumulation phase where your investment may grow before being converted into lifetime income.
Here are the types of life annuities.
Canadian insurers offer this wide range of annuity products tailored to different financial goals and risk tolerances. Many provide flexible options including guarantee options, survivor options, and death benefit options. In 2023, participating whole life and fixed-rate annuities achieved record sales in Canada, while inflation-linked annuity transactions exceeded $925 million, with more than $2.4 billion transacted between 2021 and 2023. As stated by Annamaria Lusardi, Professor of Economics at the George Washington University School of Business and a leading expert in financial literacy, annuities play an important role in retirement security by providing income certainty. Financial advisors often recommend a selection of investment options based on your retirement lifestyle goals and risk tolerance.
The primary benefits of life annuity include guaranteed lifetime income, protection against longevity risk, and reduced investment management burden for retirees. Annuities provide financial security by ensuring that individuals do not outlive their savings. They offer protection from market downturns and stock market volatility that could otherwise impact retirement savings. Fixed life annuities can be an excellent retirement income solution for covering essential expenses, while variable annuities may provide growth opportunity through variable investment options. In 2023, group annuities played a critical role in locking in strong funded positions for pension plans, with funded statuses reaching 116%, demonstrating their value in retirement planning. In accordance with David Buckwald, Fellow of the Canadian Institute of Financial Planners and CEO of TriDelta Financial, annuities can form an essential part of a retirement income strategy by creating pension-like income that lasts for life. Many Canadian policyholders appreciate the predictable income and peace of mind that comes from knowing they have a secure payment method for expenses in retirement.
The main disadvantages of a life annuity include limited liquidity, potentially lower returns compared to other investments, and loss of principal upon death without additional riders. Annuity contracts typically involve surrender charges for early withdrawals and may not keep pace with inflation without specific features to address cost of living increases. Administrative charges, sales charges, and insurance premiums can impact overall returns, especially when compared to other investment products like mutual funds. The Canadian annuity business revenue was CA$4.5 billion for group and CA$2.8 billion for individual policies in 2023, indicating significant market size despite these limitations. As per Alexandra Macqueen, Certified Financial Planner and co-author of “Pensionize Your Nest Egg,” the irreversible nature of annuities means they should be considered as part of a diversified retirement plan rather than a complete solution. Without a cashback option or death benefit protection, the entire premium deposit may be lost upon early death, making it important to consider additional options for unexpected expenses.
A life annuity is a good idea for individuals seeking guaranteed income throughout retirement and protection against market volatility. Retirement planning benefits from annuities when they complement other sources of income and align with personal financial goals. They work particularly well alongside employer pension plans or company pension plans to create multiple income streams. Current interest rates and annuity rates affect the value proposition, with current long-term interest rate outlook influencing annuity payout rates. In 2023, Canadian group annuities were 1% to 3% cheaper than longevity-adjusted solvency liabilities for plan sponsors, offering cost-effective security for retirees. As reported by Moshe Milevsky, Finance Professor at York University’s Schulich School of Business and author of “The 7 Most Important Equations for Your Retirement,” annuities can significantly reduce the risk of outliving your money, especially for those without defined benefit pension plans. Financial professionals recommend consulting with an advisor on tax-related implications, as the effects of taxes on annuity income vary between registered and non-registered funds.
Life annuities generally cannot be cashed in after the purchase is completed and payments have begun. Annuity contracts are designed as irrevocable agreements that provide lifetime income rather than liquidity. Without a cashable feature, the capital from annuity holders remains with the insurance company or life insurance carrier. In 2023, Canada’s life and annuity insurers posted $14.9 billion in pretax operational gains, matching results from 2018-2020, reflecting the stability of these long-term contracts. As noted by Matthew Williams, Managing Director at AM Best Canada, Canadian life and annuity insurers have maintained strong financial positions while adapting to changing consumer preferences and regulatory requirements. Some annuity investments offer limited withdrawal options, but these typically reduce future payments and may incur charges. Before purchasing, consider whether you might need funds for an unexpected expense during the annuity payment period.
A life annuity lasts for the entire lifetime of the annuitant, regardless of how long they live. Annuity payments continue until death, transferring longevity risk from the individual to the insurance company. The actuarial life annuity table used by the annuity issuer determines expected payment periods based on your age at time of purchase. In 2023, Sun Life led the Canadian group annuity market for the 16th consecutive year, disbursing over $1.25 billion in annual pension payments to more than 125,000 Canadians. In the view of Assia Billig, Chief Actuary of the Office of the Superintendent of Financial Institutions (OSFI), the longevity protection offered by life annuities is becoming increasingly important as Canadians live longer in retirement. Some annuities include guarantee periods ensuring payments continue to a life annuity beneficiary for a minimum period of time even if the annuitant dies early.
A life annuity pension is a retirement income product that provides guaranteed payments for life, often purchased with pension funds. Pension plans sometimes convert accumulated assets into annuities to provide retirees with secure income streams. These function similarly to company pensions, delivering regular annuity income throughout retirement. The conversion of pension income to an annuity can provide creditor protection and levels of protection against market fluctuations. In 2023, Canada Life completed $1.05 billion in bulk annuity transactions, including its first deferred members bulk annuity deal, demonstrating growth in the pension annuity market. As mentioned by Jean-François Poulin, Partner and National Leader for Pension Risk Management at Eckler Ltd., pension plans increasingly use annuities to transfer longevity and investment risks to insurers while securing benefits for plan members. Consumer protection agencies monitor these products to ensure fair treatment of annuity policyholders.
The primary difference between annuities and life insurance is that annuities protect against outliving your money while life insurance protects against dying too soon. Annuities provide income during your lifetime, whereas life insurance provides a death benefit to your beneficiaries. Term life insurance and Universal Life Insurance focus on death benefit protection, while annuities focus on lifetime income. Insurance products like annuities and life insurance policies serve complementary purposes in a comprehensive financial plan. In 2023, Canadian life insurance new annualized premium increased 4% to $1.86 billion, while the annuity business revenue was $4.5 billion for group and $2.8 billion for individual policies, showing substantial markets for both products. As observed by Jason Pereira, award-winning Financial Planner and President of Woodgate Financial, understanding the distinct roles of insurance and annuities is crucial when designing a comprehensive financial plan that addresses both mortality and longevity risks. Canadian life insurance companies often offer both types of products, allowing customers to balance protection with cash value and income generation based on their retirement income needs.
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