Tap 100 people with the question, “Would you like a guaranteed income for life?” and I suspect 100 people would say “yes”. Tap those same 100 people and ask, “Would you like to buy an annuity?” I think most would turn up their noses.
It’s not exactly clear why most Canadians react this way, since an annuity can be the equivalent of a guaranteed income for life, but it may have to do with the facts that annuities are not heavily marketed, that they depend on interest rates and that once you purchase one, you can’t get your money back. Having said this, there are circumstances in which it would pay to consider buying an annuity.
The circumstances? If you don’t know what your RRSP or RRIF is invested in. If you don’t have a TFSA because you don’t know what it is. If you’re not comfortable managing your own investments. If your mother, father and other relatives were/are long-lived. An annuity can help by making life simple – you’ll know exactly what you’ll get and when you’ll get it. It can help take the stress out of the fear that you may outlive your money.
I’ll make it easy for some of you to stop reading now: if you have already accumulated enough money to provide you with the annual income you need. Or you already have a guaranteed pension. Or you’re at the other end of the scale – you haven’t much in savings. Or your medical condition suggests you don’t have long to live.
Everyone else should at least consider buying an annuity.
Basic definition: an annuity is a contract wherein you hand over a chunk of money to an insurance company, and they guarantee you a monthly income for as long as you want – for life or for life plus 10 or 20 years – you decide.
The monthly income you get depends on interest rates – you get more when you buy at high rates and less when you buy at low rates. Rates today are low but rising. A good time to start looking. If you google “Cannex” you’ll find the biggest annuity-quote-comparison site in Canada. Here’s an excerpt from August 7, 2022, the day I wrote this column – these are the averages of the monthly income the top 5 providers were offering for a price of $100,000.
Here’s what this table tells you: If you’re a male, 70 years old, you can buy $601/month, starting the month after you fork over the cash, for the rest of your life. If you die after Year 1, the $601/month will be paid to your heirs until the 10th year after your death. If you’re a 70 year old woman, you’ll get $565/month (not discrimination – it’s because women typically live longer than men.) Using the $601 as an example, that’s an interest rate of 7.2% — $601×12=$7,212/year divided by $$100,000.
If you don’t want the income to start until you’re 75, (the 5 year deferral), you’ll get $819/month and $771/month respectively.
Compare this to the highest rate you can get based on $1,000 for a Term Deposit or GIC:
If you have some of your assets in GICs or term deposits, buying an annuity will give you more spending over the long term.
Handing over a big chunk of money that you could be managing yourself is a big deal. You want to be sure that the income you’re buying will show up in your bank account every month. As unlikely as it is that a company like Sunlife or Manulife or any of the banks that have insurance companies would go bankrupt, you have another guarantee. Assuris is a company regulated by the Canadian government whose only function is to protect policyholders of life insurance instruments (of which an annuity is one) if a life insurance company becomes insolvent. Every life insurance company authorized to sell insurance in Canada is required, by the federal, provincial and territorial regulators, to be a member of Assuris.
And what about the possibility that you buy an annuity and then you die – your money is gone without any benefit or refund. There are annuities that pay out for years after you die – the money goes to your heirs. Annuities come in more flavors than ice cream – single life, joint and last survivor, income starting immediately, income deferred to when you reach a certain age, income indexed to inflation, and so on. The more conditions you put into your contract, the less money you’ll get every month – conditions cost.
As I said early on, if you’re okay managing your own portfolio of assets, great. If you’d rather not worry about the stock market, have a look at this neglected possibility.
Dian Cohen, C.M., O.M., economist
cohendian560@gmail.com
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