Is an annuity right for you?
Perhaps you’re wondering where to invest your money to make sure it generates the income you need for your retirement. If you’d rather not have to keep making investment decisions, an annuity may be right for you.
An annuity is a contract that allows you to receive a series of regular payments for a pre-determined period of time for a given purchase price that will be higher if:
- The periodic payments are higher
- Interest rates decrease
The insurer who sells the annuity will earn less interest on the amount you’ve paid, so the annuity payments you receive from the insurer will be smaller.
- The payment period increases
If the insurer expects to make your annuity payments over a longer period, the annuity will be more expensive.
The funds used to purchase an annuity generally no longer belong to you.
You now own a series of payments as specified in your contract. The advantage is that you'll no longer have to manage your portfolio—you’ll receive the payments specified in the contract regardless of market fluctuations.
Main types of annuities:
Annuity certain (also known as fixed annuities)
This annuity provides periodic payments over a fixed period of time. For example, you can buy an annuity that will pay you $500 a month for 20 years regardless of market fluctuations. And with this type of annuity, payments continue regardless of if you’re alive or not. This annuity may or may not be indexed.
Annuity purchasing power will fall when the cost of living rises. To counter this, indexed annuities increase based on a cost of living index. Some annuities increase by fixed percentages established at the time of purchase.
Basic life annuity
This annuity provides regular payments for the rest of your lifetime. Payments from basic life annuities are guaranteed during your lifetime, but no further payments are made after you die. There is one exception: The contract will be cancelled if you die within 30 days of the annuity commencement date. Consequently, if you die shortly after acquiring this annuity, you will have paid a great deal for very little in return, unless your annuity features options such as a survivor clause or guaranteed payment period. Note that these options will increase the purchase price of your annuity.
- Survivor clause
If you buy a basic life annuity, payments will stop when you die. However, with a survivor clause, your annuity or a portion thereof will be paid to your surviving spouse after you die.
This option ensures that annuity payments will be made for at least a fixed number of years. For example, let’s say you buy a life annuity guaranteed for 10 years. Even if you die during the first 10 years of the annuity payment period, the payments will continue to be made to designated beneficiaries for the remaining years. If you live more than 10 years, payments will continue while you are alive.
What happens if the insurer making your annuity payments becomes insolvent?
Assuris covers fully monthly annuity payments up to a maximum of $2,000 per month ($24,000 per year). If your annuity offers you more than $2,000 per month, Assuris covers up to 85% of the annuity payments, with a minimum value of $2,000 per month.
To be covered by Assuris, your insurance company must be a member. This should be the case, since all insurers who sell annuities have an obligation to do so. For more details on the coverage offered through Assuris or to verify that your insurance company is a member, visit www.assuris.ca.