Life Annuities

A life annuity converts a lump sum into guaranteed income for life.

You give an insurer capital. It pays you a fixed amount every month until you die, however long that turns out to be.

That is insurance against living too long, which is the mirror image of life insurance, and it is why the same companies sell both.

What is a life annuity?

A contract, not an investment.

You pay a premium, usually a single lump sum.

The insurer calculates a payment based on your age, sex, the amount, interest rates at the moment of purchase, and the options chosen.

Payments begin either immediately or at a chosen future date.

They continue for as long as you live. If you live to a hundred, the insurer keeps paying. If you die in year three, a plain life annuity stops.

The risk has transferred. You are no longer managing a portfolio and hoping it lasts. The insurer has taken on the longevity risk, and that transfer is the product.

The main types

Single life. Payments for one life and stop at death. The highest monthly amount, and nothing remains.

Joint and survivor. Payments continue to a surviving spouse, often at a reduced percentage. Lower monthly amount, protection for two.

With a guarantee period. Payments continue for a stated minimum, commonly ten or fifteen years, to a beneficiary if the annuitant dies within it. Lower monthly amount, and it removes the fear of dying immediately after purchase.

Deferred. Purchased now, payments begin later. The accumulation is not taxed annually.

Indexed. Payments rise with inflation or by a fixed percentage. Substantially lower to begin with, and the protection is real: at three percent inflation, purchasing power roughly halves over twenty-four years.

Impaired or enhanced. Where health is materially compromised, some insurers will pay more, because the expected payment period is shorter. Underused, and worth asking about.

How it is taxed in Canada

The part most often described using American rules, which do not apply here.

A registered annuity, bought with RRSP or RRIF money, is fully taxable as income when received. Nothing is a return of capital, because none of it was ever taxed.

A non-registered annuity is different, and Canada has two treatments.

Prescribed. The taxable portion is spread evenly across every payment for the life of the contract. Level payments, level tax, which suits a retiree wanting predictable after-tax income.

Non-prescribed, taxed on accrual. More of the taxable amount falls in the early years and less later. The same total tax, arriving sooner.

Whether a contract qualifies as prescribed depends on conditions in the Income Tax Act about ownership, the annuitant and the structure of the payments. It is a question for an accountant before purchase, because it cannot be changed afterwards.

None of this is tax advice, and this practice does not provide it.

The benefits

Income that cannot run out. The only product that genuinely removes longevity risk, and no portfolio strategy replicates it.

Simplicity. No rebalancing, no sequence-of-returns risk, no decision to make each year.

Protection against your own future decisions. Cognitive decline is a real risk to a portfolio managed into advanced age, and an annuity requires no management at all.

Mortality credits. Part of what makes an annuity payment higher than a safe withdrawal from a portfolio is that the pool includes people who die early. That is the pooling working, and it is a genuine advantage available nowhere else.

Creditor protection, in many circumstances, where an insurer issues the contract and a beneficiary is named.

The disadvantages

It is irreversible. This is the largest one. Once payments begin, the capital is generally gone and the decision cannot be undone. Some contracts permit commutation in narrow circumstances, usually at a significant discount.

Nothing is left for heirs, on a plain life annuity. A guarantee period or a joint structure changes this and reduces the payment.

Inflation erodes a level payment. Twenty years of even moderate inflation materially reduces what the same monthly amount buys. Indexing addresses it and costs a great deal at the outset.

Rates at the moment of purchase are locked for life. Buying when interest rates are low fixes a lower payment permanently. Staggering purchases over several years spreads that risk and is rarely suggested.

No liquidity. The money is not available for an emergency, a medical expense or an opportunity.

Counterparty risk. The payment depends on the insurer's solvency. Assuris protects Canadian annuitants within published limits, which is meaningful and is not a government guarantee.

Is it a good idea?

It depends on what the rest of the picture looks like, and there are cases where the answer is clearly yes and cases where it is clearly no.

It suits someone with adequate guaranteed income missing, longevity in the family, no strong wish to leave capital, and a preference for certainty over control.

It suits poorly someone whose guaranteed income already covers essential spending, who wants to leave an estate, who may need liquidity, or who is buying at a young age and locking in decades of inflation risk.

Partial annuitisation is the answer more often than either extreme. Annuitising enough to cover essential fixed costs, and keeping the rest invested and liquid, gives a floor without giving up all control. It is discussed far less than it should be, because it is less dramatic than the all-or-nothing framing.

Annuities against life insurance

They are structural opposites, which is worth stating plainly because the same companies sell both. The cheapest form of the insurance side is term insurance, which covers dying too soon for a fixed period and nothing else.

Some retirement plans use both, which is less contradictory than it sounds: an annuity covering essential income, and permanent insurance restoring the capital to heirs that the annuity consumed. That structure works arithmetically and is only worth doing where both needs genuinely exist, rather than because it generates two sales.

Anyone proposing it should show what each piece costs separately, and what the outcome looks like without either.

What a life annuity pension is

The phrase usually describes the pension option a defined benefit plan offers at retirement, which is functionally a life annuity provided by the plan.

The same questions apply. Single life or joint. Whether a guarantee period is attached. Whether it is indexed.

A joint and survivor option protects a spouse and reduces the payment, and it is frequently declined without the spouse understanding what has been given up. In several provinces, spousal consent is required to waive it, and that requirement exists precisely because it was so often waived.

How the payment is actually calculated

Not a return, which is the misunderstanding that makes annuity quotes hard to compare against anything else.

Three things determine it.

Life expectancy at your age, from the insurer's mortality table. A seventy-five-year-old receives a much higher monthly payment than a sixty-five-year-old for the same capital, because the expected payment period is shorter.

The interest rate the insurer can earn on the capital over that period, which is why quotes move with bond yields and why the same person gets a materially different answer in different years.

Mortality credits. The pool includes people who will die earlier than average, and the capital they do not consume supports payments to those who live longer. This is the mechanism that lets an annuity pay more than a safe withdrawal from a portfolio, and it is not available outside a pooled arrangement.

Why a quoted percentage misleads. An annuity paying six percent of the purchase amount annually is not earning six percent. Most of each payment is your own capital coming back. Comparing that figure against an investment return is comparing two different things, and it is the commonest error in this subject.

Shop the quote. Payments for identical contracts differ meaningfully between insurers on any given day, because each is pricing its own assumptions. A quote from one company is not the market.

When to buy, and why the timing is not neutral

Age raises the payment, for the arithmetic reason above. Waiting from sixty-five to seventy-five substantially increases the monthly amount, at the cost of ten years of payments not received and ten years of managing the money yourself.

Interest rates at purchase are locked permanently. This is the input people underestimate. The same capital buys a materially different lifetime income depending on the rate environment on the day, and that difference persists for decades.

Laddering addresses both. Buying in tranches over several years, rather than all at once, averages the rate environment and raises the average purchase age. It is more work and it removes the single worst outcome, which is committing everything on an unlucky day.

Health is an input too. Someone with a materially shortened life expectancy may qualify for an enhanced payment, and very few people think to ask.

The questions to ask before signing

What is the monthly payment, from at least three insurers?

What is the payment on each structure I am considering: single life, joint, and with a guarantee period? The differences between them are the price of each protection.

Is the contract prescribed for tax purposes? If nobody can answer, ask an accountant before proceeding.

What happens if I die next year?

Can this be commuted, and on what terms? Assume not.

What is the insurer's financial strength, and what does Assuris cover?

What income will I still have that is not annuitised? If the answer is very little, the proportion is probably too high.

Common misunderstandings

That an annuity is an investment. It is a contract transferring longevity risk. It has a return in an accounting sense and comparing it against a portfolio misses what it is for.

That the insurer profits when you die early. The pooling is the design. Early deaths fund the payments of those who live long, which is the mechanism, and it is disclosed rather than hidden.

That a guarantee period makes it safe. It guarantees a minimum number of payments, not the return of capital, and it reduces the monthly amount to pay for that.

That it can be undone if circumstances change. In most cases it cannot, and this is the assumption that causes the most regret.

That inflation protection is unaffordable. It is expensive at the outset and it is the risk most likely to matter over a long retirement. The comparison worth seeing is the indexed and level quotes side by side, projected twenty years out.

What was removed from the earlier version of this page

Stated openly, because a reader is entitled to know what changed.

Several large dollar figures describing Canadian annuity market volumes, in the billions and hundreds of millions. None carried a source that could be checked. A statistic without an attributable origin is not evidence, and repeating it here would have passed somebody else's unverified number on under this practice's name.

Three attributed opinions from named professionals, each described with a credential. The observations themselves were unremarkable and the page does not need them. Attributing a specific statement to a real, identifiable person requires knowing they said it, and that could not be established here.

Nothing removed was known to be false. It was removed because it could not be verified, which is a different and stricter test, and the right one for a page that names living professionals.

A note on where annuities fit against this practice

Worth saying directly on a page published by an insurance practice.

This practice does not primarily place annuities. The work described across this site concerns permanent participating coverage, which is a different product solving a different problem.

That matters when reading this page. A practice earns nothing from persuading you out of an annuity and into permanent insurance if the annuity was the right answer, but it earns nothing from the annuity either, and neither fact makes this page neutral.

What it does mean is that the page has no reason to overstate the case for annuitisation, and no reason to understate the case against permanent coverage, because it is not selling the thing it is describing.

Read it accordingly, and take the annuity question to someone who places them regularly. Comparing three quotes and understanding whether a contract is prescribed are both routine work for a practice that does this every week, and they are not routine here.

The one number to compare

The monthly payment, from at least three insurers, on the same structure.

Quotes for identical contracts differ meaningfully on any given day, because each insurer prices its own assumptions. A quote from one company is not the market, and this is the rare decision where shopping costs nothing and the difference persists for life.

The decision to stage rather than commit

Buying in tranches over several years averages the interest rate environment and raises the average purchase age, both of which improve the payment.

It removes the worst outcome, which is committing everything on an unlucky day and fixing that result for life.

It is more work and it is rarely proposed, because a single transaction is simpler for everyone except the person living on the result.

Partial annuitisation, which is proposed least often

Annuitising enough to cover essential fixed costs, and keeping the remainder invested and liquid.

It gives a floor without surrendering all control, and it addresses the objection that annuitisation is irreversible by making the irreversible portion smaller.

It is discussed less than either extreme because it is less decisive, and it suits more households than either.

And ask about impaired or enhanced rates if health is materially compromised. A shorter expected payment period can produce a higher payment, and very few people think to raise it.

What this page will not do

It will not tell you whether to buy one.

Annuitisation depends on what guaranteed income you already have, what essential spending must be covered, whether you want to leave capital, your health, and interest rates at the moment you would buy. Those are facts about you and about the market on a particular day.

And this practice does not sell portfolios, so a page here recommending against an annuity would be no more disinterested than one recommending for it. The compensation position is stated on the author page and at the foot of every page.

The permanent insurance products this sits alongside are on whole life insurance.