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Some Common Questions About Annuities

After a post last week about how annuities work, there were a lot of questions in the comments and via email from readers (and Kathryn).  Below is a list of common questions and answers about annuities.  If you have any additional questions, please add them to the comments.

What are the advantages of annuities?

You will pay far less taxes with a non-registered annuity compared to GICs.

The monthly distributions are guaranteed. No mutual fund or ETF can say that.

What are the disadvantages of annuities?

You lose control of your money. Once you buy an annuity you can not change your mind and get your money back.

What is a good age to purchase an annuity??

Generally in your 60’s. However, there are always unique cases such as in my example for the RDSPs (previous posting). One might also buy an annuity for a large sum of money that needs to be distributed over fixed period of time in a tax efficient way. An example of this might be an large inheritance that needs to be spread over 10 years for fear of the children spending the money too fast.

Can you purchase an annuity for someone else? Say you are 50 and have terminal cancer. Your mother is in her early 70s and you worry about her after you’re gone. Can you purchase an annuity for her using your money?

Yes, also see question/answer above.

Is it possible to set them up inside a TFSA to avoid tax?

Yes, but since the limit for TFSA is currently very small, this would not be practical.

How much are annuity rates/payouts?

The rates change daily because they are based on interest rate and different competitive forces in the market. Like mortgage rates at different banks, one day differs from the next.

Can we buy them through a fee for service financial advisor?

Yes, if you like paying extra fees! The insurance company pays a commission to the advisor directly so he will get paid twice if you pay a fee also. In fact, an interesting trend is for fee only advisors to recommend annuities while at the same time saying commission advisors make too much money! There is a book written by a firm that offers second opinion (for a fee) and talks about buying an annuity as party of retirement planning.

What happens when you die?

This depends on the type of annuity that you buy. See my posting on how annuities work for details.

What happens if you sign up and then die soon after?

Some companies offer a return of principal minus distribution upon early death as defined in their policy.

How is my annuity income determined?

  • Current interest rates
  • Amount of money you desposit
  • Your age and sex
  • Number of years for which you want the company to guarantee your income payments

How do I get one? Who do I call? Who sells them? What do I need to bring to the appointment?

Licensed insurance agents only (like me!). Bring your cheque book :-)

If someone had cancer or past history of heart problems can they get more money from an annuity payout?

Yes, this must be underwritten by the insurance company. Example 65 year male $100,000 annuity would get $680/month (single life annuity). With health problems this would go up to $965/month or 42% more. This would be another reason to have life insurance (permanent) in place before health problems to explore an annuity.

Brian Poncelet who is an insurance specialist and independent certified financial planner (CFP) working in the financial services industry since 1994. Along with insurance, Brian Poncelet focuses on mortgage and retirement planning.

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About the author: This is a guest post. You can read more about the author in the biography above.

{ 4 comments… add one }
  • Jen Moore March 30, 2010, 11:33 am

    I am also a licenced Insurance salesperson and when I am considering a Life Annuity for a client, I always run several quotes with different “guarantee periods” to find one that will ensure at least a return of the client’s original capital. Incorporating a “guarantee period” ensures that if a client dies early in the annuity payout schedule, their beneficiaries will continue to benefit either from a lump sum payment at death or continued annuity payments. I definitely recommend shopping the market for annuities because the payments can vary widely from one insurance company to the next, depending on the age and sex of the client. Considering that an annuity is a long term relationship with an insurance company, it’s also a good idea to work with a highly rated company that will be around for the long term. Note that annuity payments are also protected by Assuris (which is like CDIC, but for insurance products) and in the event of a company failure, the contracts would likely be assumed by another insurance company.

  • Kathryn March 30, 2010, 5:20 pm

    This is great information. Thanks for sharing. I feel like I understand a lot more about annuities than I did a few weeks ago. I’m still not sold on the idea and know I need to understand them fully before I’d ever recommend them.

    I understand the appeal of a set income for life but don’t like the idea of losing losing all control over the money. I still don’t fully understand the fees involved and being that it’s commission based and sold as an insurance product, there are a few red flags that remain waving.

    As Brian is admittedly biased, I’d love a counter argument post from someone who thinks annuities are a bad idea.

  • cannon_fodder April 23, 2010, 1:48 am

    It would seem, at first blush, that annuities could form PART of a solid retirement income stream. Perhaps if one had the luxury, one could purchase annuities to cover all fixed expenses and then other investments, pensions, government programs, etc. would cover discretionary expenses.

  • Mike @ Annuity Rates August 4, 2013, 5:19 am

    Every retiree has his own savings that they need to turn into a source of income. And annuity is designed exactly to do so. That’s why there will always be a logical appeal to annuity. But in my view the only drawback of annuity is its complicated nature. Losing control over the invested money is an example of that. I think if some withdrawal method in introduced, it will definitely increase the appeal of annuity to mass population.

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