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How Annuities Work

Lately, I’ve been receiving a few questions regarding annuities.  As I only have a basic understanding of annuities , I emailed Brian Poncelet (CFP and insurance specialist) to provide more details on on the types of annuities.  For those of you fresh to the concept, investors who purchase an annuity would pay a lump sum to an insurance company and receive a cash flow stream for the rest of their lives.

Short history

The ancient Romans issued contracts called an “annua” that promised an individual a stream of income for life. Roman citizens would make a one-time payment to the annua, in exchange for lifetime payments made once a year.

In North America, annuities have been around for over 200 years. The average purchase age appears to be the mid sixties. Annuities are purchased for various reasons but most commonly for peace of mind and tax benefits. Others may look to buy an annuity when they receive a lump sum inheritance.

Annuity payments consists of both principal and interest. This interest is taxable but is spread over the life of the annuity, therefore the tax is deferred. While your other sources of income (GIC’s, stocks, mutual funds) may eventually be depleted, you cannot outlive your annuity income. Life annuities pay a lifetime of income.

Types of Annuities

  • Term
  • Term Certain Annuities
  • Life Annuities
  • Prescribed Annuities
  • Indexing

Term Certain:

Fixed payment for a fixed period. If annuitant dies during the guarantee period the beneficiaries(s) receive the income payments.

Life Annuities

As the name suggests, life annuities offer guaranteed regular income for the rest of your life. The annuitant will not run out of money but if he/she dies early, there is no refund.

Joint Life Annuities

The annuity is purchased on 2 lives, issued with or without a guarantee period. They may be sold as Reducing or Non-Reducing annuities. At the first death (or death of the primary annuitant), the surviving annuitant receives a reduced periodic income. If the Reducing Annuity has a guarantee period, the reduction in periodic income would occur after both events have occurred (the death of one of the annuitants and the expiration of the guarantee period). The terms of the guarantee period are usually based on the age of the youngest annuitant.

Variable Annuity

With typical annuities, the periodic income paid to an annuitant is predetermined, consisting of principal and interest. The interest was determined at the time of purchase and does not change.

With variable annuities the payment can vary because the interest piece is based on the stock market. However most do offer a minimum rate of interest for every year that the annuity remains untouched.

This annuity is like the Manulife Income Plus. In a bear market this does not look so bad. However in a bull market this is expensive. A variable annuity should be bought and thought of as a pension purchased for the long term.

Therefore, it the purchaser is seeking immediate income payout, it is best to avoid variable annuities.

Prescribed vs Non-prescribed Annuities (non-reg only)

Non-prescribed Annuity: taxes payable on the income earned are higher in the early years of payments but gradually decrease to zero over time.

Prescribed Annuity: the taxes payable on the income earned are paid evenly throughout the term of the contract.

How is my annuity income determined?

  1. Current interest rates
  2. Male vs. Female: a female annuitant is expected to live longer than a male annuitant of the same age. She will received a smaller periodic payment because the insurance company assumes that they will have to pay the periodic income for a longer period than for the similar male life.
  3. Number of years you want payments guaranteed: the longer the payment period, the smaller the periodic payments.

Insured Annuity

A life income annuity (payable until death) is attractive because the insurance company has to pay for life, even if you live to 110. However if you die much earlier than you expect, the insurance company keeps all of the money. Rather than gamble with your family’s inheritance, consider purchasing an insured annuity. This is a 2 step process where the annuity is backed by a life insurance policy for the same amount. If you die early, the life insurance is paid to your beneficiary tax free.

Back to Back Annuity (insured annuity)
This example compares GIC vs a life annuity with a matching life insurance policy.


  • Current GIC rate 3.25% (five year rate lock-in)
  • 65 year old male purchases $100,000 non-reg annuity and $100,000 life insurance policy
  • Tax bracket 31.41% ($40,970 up to $65,345) Ontario
Insured annuityGIC
Gross income$8,165.28$3,250
Taxes payable$742.90$1,012.37
Life insurance$3,240$0
Total net$4,182.38$2,237.63

After taxes are considered, a GIC of over 6% is needed to equal the annuity. At higher tax brackets, a GIC paying over 8% is needed! Also, under the annuity strategy, he pays less tax as he is showing less taxable income and is less susceptible to OAS claw backs and age amount (age 65) claw back. This could mean many hundreds or thousands of dollars saved every year.

Currently interest rates are low, but because the way annuities are taxed, they will always pay a higher income than GIC’s at higher rates.

Early Planning is Best

To lower the insurance premium required to cover the annuity and to get an even higher rate of return, permanent insurance should be considered at a much earlier age (and better health) if cash flow permits. Or to give more options in retirement, such as selling the house in retirement and living off the capital. Insurance fills the hole after the money is spent.


An individual who plans well for their future, could buy a 20 pay life (paid for 20 years) insurance policy at $2700 per year (age 40). The insurance coverage would start at $100,000 and would be worth $215,000 by age 65 and have a cash value of $108,000. Not only would this insurance more than cover the annuity purchase at 65, but the individual would have access to the cash value at age 65. This allows for more options for a comfortable retirement.

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.

If you would like to read more articles like this, you can sign up for my free weekly money tips newsletter below (we will never spam you).

FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 68 comments… add one }
  • Avatar Michael James March 18, 2010, 9:57 am

    Thanks for the useful summary, Brian. As it happens, I’ve been trying to look into annuities lately. Do inflation-indexed life annuities exist in Canada? As an example, what I’m looking for is turning over an RRSP’s value in return for a lifetime of monthly payments rising with inflation. Obviously, the initial payout level would be lower than with a life annuity with fixed payments. If such a beast exists, is there some online source of Canadian quotes that you’re aware of? All my searches end with an attempt to collect my contact information.

  • Avatar 2 Cents @ Balance Junkie March 18, 2010, 10:31 am

    This is great information. Like FT, my knowledge of annuities is pretty sketchy. This really helps fill in the gaps. What happens to the annuity if the insurance company becomes insolvent or can’t make the payments for whatever reason? Is there any protection like the CDIC or CIPF for investors?

    Can anyone recommend a relatively recent book that covers annuities? Is there an “annuities for dummies”?

  • Avatar ParisGirl111 March 18, 2010, 11:10 am

    This is great information. I have never really understood annuities. Is there a book that you can recommned that would go more in depth in explaining each type of annuity and how to go about selecting the right one for each type of life situation?

  • Avatar Chris March 18, 2010, 12:04 pm

    Great intro article to annuities. One thing I’m confused about is the purchase of permanent life insurance.

    I have always heard that perm life insurance is a waste of money and that term is the way to go. Why is perm insurance a good idea in this case.. or any case for that matter?

    Or is it that term is the best option only when you have non-adult children that need to be provided for?

  • Avatar ctreit March 18, 2010, 12:04 pm

    It would be great to get an idea how much these annuities cost the consumer. I am sure insurance companies do not provide this service for free and that insurance sales people do not sell annuities without getting a (hefty?) commission. Can you shed some light on that? Can you throw out some general idea?

  • Avatar Brian Poncelet,CFP March 18, 2010, 12:44 pm

    Hi Guys,

    One reason to like (not love) annuities is the risk is put back on the insurance companies. As a financial planner (15 years ago) I was taught that just buy term and invest the difference. The markets always go up. Since the last 10 years has generally been bad (lots of debt around the world). My thinking is it is not a bad idea to look at ideas (to be conservative) insurance does this.

    The idea of permanent insurance (which I own) helps some people who have pensions worth hundreds of thousands of dollars (if they live a long time) or die too soon. These pensions are really annuities the cash value is usually much smaller than what the payout is over many years.

    Teachers in Ontario (and other provinces) and I beleive many government workers at retirement can elect to get a higher than normal pension… if they die, their partner will get a much lower pension. When you price out the permanent life insurance (assuming one is healthy) the extra pension in retirement is worth it! Plus if the spouse getting the lower pension gets the tax free money if the other spouse dies too soon. The problem is when this concept is introduced there maybe health problems plus they are in their late 50’s or 60’s.

    Life insurance & annuities are covered by assuris http://www.assuris.ca/
    All insurance companies in Canada, like Canada life, RBC life etc. fund this. If you look at it closely the coverage in many ways is better that the CDIC the banks offer.

    Also, the melt down of 2008 showed governments are willing to back up Insurance companies and Banks to the end of the world if they have to.

  • Avatar Brian Poncelet,CFP March 18, 2010, 1:48 pm

    Hi ctreit,

    You are right on both counts! Insurance companies make money and agents (like me make money). I assume you don’t work for free?

    Ok, your question (about a hefty commission) compared to other products like mutual funds or a advisor charging a fee for his/her services, annuities pay a lot less to advisors!!

    The smallest amount that can be bought is about $10,000 for an annuity.

  • Avatar bob March 18, 2010, 2:32 pm

    hi Brain,

    “The insurance coverage would start at $100,000 and at age 65 would be $215,000. This would continue to grow to $451,000 at age 85”

    i dont understand this..i got a quote from my agent for manulife pay20, where i pay premiums for only 20 years( i am 40 years)…

    but my insurance coverage is always only $100,000..does not increase the way you project…can you please clarify.


  • Avatar Brian Poncelet,CFP March 18, 2010, 4:34 pm

    Hi Bob,

    The key here is the paid up additions (which is growing tax free and sheltered) this buying extra life insurance every year. Why? Since CRA has a maximum you can put into (cash) a life insurance policy, in my case a whole life policy…. which Manulife does not offer any more.

    To keep this on side with CRA, the insurance companies use some of the cash value to buy more insurance every year.

    You can get this money out tax free by a loan through the insurance company or a bank. If you pay the loan back the cash value grows as if you never took the money out!

    So what you really are doing here is the opposite of most insurance policies sold. You are putting the maxium cash (allowed by CRA) getting the least amount of life insurance coverage. Every year the insurance grows (keeping up with inflation) or in say 20 -30 years you have 2 to 4 x or more coverage ths cash value also keeps growing and the insurance keeps growing until you die.

    Since the next question will be rate of return…after twenty years it is about 5% tax free. This is about the average rate over 100 years even during the 1930’s . There has never been a negative year.

    When the policy is set up for extra cash the money (bonds, mortgages, some stocks and real estate the MER is only about .20) So the commission, (for the agent) dollar for dollar, is lower than selling term insurance! This is a different story you get from some others.

    I could write a whole story on this topic.

  • Avatar Michael James March 18, 2010, 4:36 pm

    Back to annutities, do inflation-indexed life annuities exist in Canada?

  • Avatar Brian Poncelet,CFP March 18, 2010, 4:57 pm

    Hi Michael James,

    Yes inflation-index annuities exist in Canada.

  • Avatar Michael James March 18, 2010, 4:59 pm

    Thanks for the reply, Brian. Is there somewhere I can go online to get an idea of what they pay for a given premium? I assume it depends on age, gender, current interest rates and inflation rates, etc.

  • Avatar Brian Poncelet,CFP March 18, 2010, 5:16 pm

    Hi Michael James,

    Since annuities (pricing changes daily) The best is your agent who can quote you from several companies. Currently I don’t know any on-line places to get a quote that is not conntected to an insurance agent.

    For non-registered money some insurance companies may have less taxable payouts than others. You really can’t get that from looking at a system that shows different insurance companies…you have to check each company out. (That’s what an agent does).

    If you want you can drop me a line and I will get you some quotes from a number of insurance companies.

    You are correct about age/gender/etc.

  • Avatar Tetsuo69 March 18, 2010, 5:21 pm

    Nice example comparing a GIC to an insured annuity. Apples to oranges, as unless I missed something the insured annuity won’t give you the principle back while a GIC does.

    Offering financial advise is best if you also supply rates of return, ROI, or some other full picture metric, and less bang and fizz on top.

  • Avatar Brian Poncelet,CFP March 18, 2010, 6:49 pm

    Hi Tetsuo69,

    You forgot GIC’s get taxed, much higher. If you have a pension etc. one may find OAS gets clawed back as well as the age amount (age 65 ..$5,200 line 303) this gets clawed about starting at about $31,000!

    If you have a GIC alternative that factors in taxes and guarantees I’d like to see it. Remember, to get the best rates one has to lock in for longer terms like five years is there a cashable five year GIC at high rates?

  • Avatar Brian Poncelet,CFP March 18, 2010, 7:10 pm

    Questions about annuities books to read.

    I really don’t know of any books to read, but I did come across Annuities for Dummies. This book was written in the US but the ideas seem to be ok here as well. Maybe someone can let me know if it is any good.

    I assume if you can’t sleep at night, this would be an excellent read.

  • Avatar chad March 19, 2010, 12:44 am

    is it alright for a 35 old person to buy annuity?
    already have rrsp and tfsa maxed
    looking to retire at 55
    should i wait for higher rates?

  • Avatar Brian Poncelet,CFP March 19, 2010, 8:18 am


    Without knowing anything about you, I’d think you are too young to consider an annuity. At your age the down side is the lack of use and control of your money.

    If you have a family have extra cash (conservative) and want more options later, I’d say check out a max funded whole life policy (see case study above). Later, (in life) if you want to look at an annuity you have the principle covered.

  • Avatar Bob March 19, 2010, 12:17 pm

    hi Brian,

    thanks for your reply….
    are there any insuarace company offering the features you mentioned you currently have on your insurance.


  • Avatar Stefan Alexander March 20, 2010, 10:27 pm

    Interesting information, great to know about all this.

    I don’t mean to sound picky, but this article needs some serious editing. The information was great but I had trouble following it. The posts here are generally very well-written, which lends credibility to the content, so that’s why it’s so surprising. Even the first sentence wasn’t compete…

  • Avatar Ms Save Money March 22, 2010, 6:11 pm

    Thanks for this post! I hadn’t understood how annuities worked either prior to reading this post. I would definitely have to consider which type of annuity is best for me.

  • Avatar Brian Poncelet,CFP March 22, 2010, 9:13 pm


    There is a number of insurance companies that have the features I talked about (life insurance).

    London Life, Canada life, Empire life, Equitable life are a few.

    When you own a whole life policy you are really an owner. In the past companies like Martime Life were bought by Manulife which had to give shares to the policy owners. This was a wind fall!

    The only insurance company left that this could happen (a wind fall of stocks) is Equitable Life. All insurance companies now are publicly traded.

  • FT FrugalTrader March 22, 2010, 10:14 pm

    Thanks for updating the article Brian!

  • Avatar Henry March 23, 2010, 12:17 pm

    Brian: Can you discuss the various commissions that you get from selling insurance?

    From my understanding, term life and whole life insurance pay upfront 15% commission of annual premium. I suppose that life insurance offers a trailing commissions as well. Segregated funds have a commission of 6% upfront and .50% to 1% annually as trailing commissions. My numbers may not be right, but this is what I have read.

    I think it is fair for people who buying these kinds of policies have the right to know what kind of commissions they are paying. I believe products and fees from financial services industry should be transparent and understandable for the average person.

  • Avatar Brian Poncelet,CFP March 24, 2010, 9:00 am


    People can ask how much they (agent) gets paid plus the agent must disclose that they get paid a commission. Insurance is a wants product, most people buy it for what it does, not how much the agent gets paid. With the idea that cheaper is better does not work with insurance.

    An example is term insurance (which I own) and permanent (which I own).
    For term insurance the insurance companies start making money after year 2. For permanent insurance policies this can take up to 5 years! Agents can get paid less for selling permanent insurance (for premiums paid) than term insurance.

    Knowing that, will they(customers) stop buying term and buy permanent life insurance instead because the agent gets paid less?

    What types of insurance do you own?

  • Avatar Brian Poncelet, CFP March 25, 2010, 1:21 pm

    2 Cents @ Balance Junkie


    This is great information. Like FT, my knowledge of annuities is pretty sketchy. This really helps fill in the gaps. What happens to the annuity if the insurance company becomes insolvent or can’t make the payments for whatever reason? Is there any protection like the CDIC or CIPF for investors?


    Go to http://www.assuris.ca . the annuity would be protected up $2,000 per month for life (this would mean you have well over $250,000)

    Over $2,000 per month 85% is protected.

    All insurance companies (including banks selling insurance) fund this. The protection levels is much higher than the CDIC coverag in many cases.

  • Avatar Susan Mladenovich, CMA March 26, 2010, 2:00 pm

    I am curious how the annuity plan that is offered by Consumers Union (aka Consumer REports) compares to regular annuity plans.

    Some feedback would be appreciated. Here is a link to the information on their site.


  • Avatar Susan Mladenovich, CMA March 26, 2010, 2:05 pm

    Also, here is some info at morningstar that shows payments for various annuities.


  • Avatar Brian Poncelet,CFP March 26, 2010, 8:03 pm

    Hi Susan,

    The quotes they are showing is way off.

    Here is a few examples:

    (Canada Life)
    Female age 60 $649.87
    Female age 75 $505.73

    BMO Insurance
    Female age 60 $672.06
    Female age 75 $510.72

    So a female who is older gets paid less?!

    Also, there is no taxable portion included (important information if non-registered) The taxable portion may vary from company to company. The key is how much do you want to keep?

    The numbers I ran from Canada Life web site is different for both male and female. Another example,
    Male age 60 $604.04 vs. the torontorstar/morningstar quote of $663.46

  • Avatar Lump Sum Annuity April 5, 2010, 6:15 am

    I read your article it’s really Nice article on Annuity,have some very good points in addition to this i want to discuss some more points regarding Annuity ::-

    1. It is just and natural that every employee saves some money for his future.He has to invest these savings so that after his retirement,he gets some money every month which he can use for his day to day needs.

    2. Annuities can be structured in a number of ways; varying accumulation period, length of income payments and other factors.

    3. Annuity payments are taxable payments. On each monthly payment you receive you will be held responsible for paying a tax on it.

    4. Ways to sell annuities :

    1.Other pension.
    2.Security for a loan.
    3.Big purchase.

  • Avatar rob April 5, 2010, 1:33 pm

    hi Brian,

    after reading your posts, i got interested in insurance & was researching…Manulife..
    How you apply your Performance Credit is your decision. You can add it to your Accumulation Account or use it to buy Paid-up or Term Option Insurance, which will also earn a Performance Credit. Accumulation Account – is an investment account within the policy that earns daily compounded interest.

    Paid-Up Insurance – extra coverage that is pre-paid, which means there are no additional premiums after the lump-sum payment.

    the prepaid insurance how does it works?
    how much insurance would the dividend buy..what mortality rate would they take?

  • Avatar rob April 5, 2010, 1:39 pm

    hi Brian,

    you might have read these 2 books..if not..they might interest you..



    in the 2 nd book the author says in Universal life some companies let you use an index..but with no loss potential..(ofcourse he is talking in american context)..

    for example if you use a canadian index..the insurance company would credit you to the tune of index gain..but subject to a cap..but when the index loses they credit a minimum like 1%…i would be happy even if there is no credit in the loss years..but as long as they dont apply the loss to us..
    does any insurance company in Canada offer the feauture..

  • Avatar rob April 5, 2010, 2:08 pm

    hi Brian,

    as an update to my earlier post..do we have any product in Canada like these(from USA)

    “You can get 96 – 98% of the average annual return of the S&P500 index (maybe more if there’s several down years) with NONE of the associated risk of loss of principal with an Eqyity Indexed Universal Life (EIUL) Insurance policy.”

  • Avatar Brian Poncelet,CFP April 5, 2010, 10:29 pm

    Hi Rob,

    Not that I heard of. (your post 33)


  • Avatar cannon_fodder April 23, 2010, 12:01 am


    Thanks for writing this article. I have a couple of questions:

    1) Do you see instances of where it makes sense to have combinations of annuities (e.g. either different types or different terms)?
    2) Do you have to live in the same country in which you purchase the annuity? For example, if you plan to spend a significant, or all, of your time in retirement in a country that uses the US dollar, it would seem to make sense to purchase an annuity in US dollars. Do Canadian companies offer US denominated annuities?


  • Avatar Brian Poncelet,CFP April 23, 2010, 9:29 am


    You asked some interesting questions.

    1) Do you see instances of where it makes sense to have combinations of annuities (e.g. either different types or different terms)?

    Answer: Each case would be different so it would be difficult to answer unless you gave me more information. Like age health, how much guaranteed income you want etc.

    2) Do you have to live in the same country in which you purchase the annuity? For example, if you plan to spend a significant, or all, of your time in retirement in a country that uses the US dollar, it would seem to make sense to purchase an annuity in US dollars. Do Canadian companies offer US denominated annuities?

    Answer: If you are Canadian and like your money to be in your US account in your place in Phoniex, Arizonia in February buy in Canada!

    All insurance companies have to contribute to Assuris (like banks CDIC). So your monthly annuity is guaranteed to pay $2,000 per month! (this is like in many cases covers over $200,000 that was used to buy the annuity) or 85% above this amount. Example, a monthly payment of $10,0000 per month for life (insurance company fails) $8,500 per month is guaranteed. I don’t think you would have that kind of protection in the US.

  • Avatar rob April 26, 2010, 6:27 pm

    Hi Brian,

    In Universal we get the death benefit & also the investment account(side account..cash value)

    whereas in whole life we just get the death benefit..the insurance company keeps the cash value…isnt that unfair…i am just curious how could such a rip off be permitted…


  • Avatar Brian Poncelet,CFP April 27, 2010, 12:43 pm


    To answer your question can you give me some numbers to work with and what is your goals. For example is the death benefit you want, or to grow your money tax free or both?

    How many years do you want to fund it? How much can you contribute? Age, health, sex (male/female).

    Once you have these numbers we can go over the pros and cons of each. If you want, you can drop me a private e-mail or contact me.



  • Avatar Derp December 25, 2010, 4:42 am

    To help decrease the particular insurance cover premiums forced to covers this annuity in order to have an even increased rate involving go back, lasting insurance plan need to be considered with a significantly previously age (and superior health) whenever profit permits. So they can supply far more selections throughout old age, like marketing your property throughout old age and also existing heli-copter flight money. Insurance policies fills your pin following the cash is actually used.

  • Avatar Brian Poncelet, CFP December 27, 2010, 3:10 pm


    Can you explain? I did not understand a thing you said.

  • Avatar Steve February 17, 2011, 4:16 pm

    Hi Brian,

    “buy a 20 pay life (paid for 20 years) insurance policy at $2700 per year (age 40). The insurance coverage would start at $100,000 and would be worth $215,000 by age 65 and have a cash value of $108,000”

    I’m assuming the increase from $100,000 to $215,000 is from buying more death benefit via paid up additions. But uncertain on the cash value of $108,000. Could you clarify? Also, do you know which of the insurance companies are still offering a pay 20 policy. Believe you mentioned above Manulife no longer does.

  • Avatar Brian Poncelet,CFP February 18, 2011, 12:12 pm

    Hi Steve,

    You are correct the increase is (life insurance is paid up additions).

    Manulife does not offer any whole life policies.

    Equitable & Canada life are companies I look at for whole life. You can also get this with London Life as well. (20 pay).

    If you go to my site under financial tools I have Person A ($2,000,000) and person B ($1,500,000 with whole life insurance). http://www.rightinsurance.ca/tools-person-a-b.html

    In a nutshell, Person B has more money in retirement and pays less tax and of course has better protection!

    This concept allows the person not to lose control of the lump sum to the insurance company (which brothers some people). The key here is to do advanced planning.

    The software I have is called Wealth In Motion. Most software programs (that are free) assume a certain rate of return (which may or may not happen) but do not factor inflation, taxes, stock market declines, lost opportunity cost, technological changes and much more. A great book to read as as starting point is called LEAP by Robert Castigilone this will seem counterintuitive at first but through examples (our tax system) you may see things in a different light.



  • Avatar Steve February 22, 2011, 3:20 pm

    Hi Brian,

    Thanks for the confirmation regarding the paid up additions and companies currently offering the 20 pay policy. I’ll review that link at my next free moment. In the meantime, I’m still uncertain on how the cash value is increasing (in the example above upto $108,000). Could you clarify?


  • Avatar Brian Poncelet,CFP February 22, 2011, 3:45 pm


    The best way to explain paid up additions is this:

    CRA says this line is the maxium you can put in your insurance policy growing tax free________________________________

    The insurance company says this line is the minimum you must pay. ____________________________________________

    Notice CRA’s line is higher. In order to have the money grow tax free the insurance company buys more insurance coverage on your behalf (to keep within CRA’s rules). So over time the insurance coverage and cash value grows. This is called paid up additions. I hope this helps.


  • Avatar Steve February 24, 2011, 1:14 pm


    One last question (I believe). In your example, we’re you projecting using a par policy (dependent on dividends) or a policy with a more guaranted return?

  • Avatar Brian Poncelet,CFP February 24, 2011, 3:49 pm


    The participating whole life over time is much better than any guaranteed return (like putting GICs in a UL policy).

    Think of the insurance as a tool which allows you to spend more money in retirement and pay less taxes if you want less risk better protection and have dependents… this may be another club to use in your golf bag or not, this is like a putter most people do get hole-in ones all the time, so they use a putter. You may want to review http://www.rightinsurance.ca/tools-person-a-b.html and get the book which I talked about earlier. If you want, feel free to drop me a line and I can go into more details.



  • Avatar VK July 22, 2011, 7:27 pm

    Can you explain why person b pays less tax?

  • Avatar Brian Poncelet, CFP July 22, 2011, 8:49 pm

    Great question VK,

    Since the payments are a form of interest and return of your capital you are only taxed on the interest. So for open money any one over 65 this bets GICs any day plus like GICs the annuities are guaranteed.


  • Avatar Mimi August 25, 2011, 4:29 pm

    Hi Brian,
    My son got a annuity settlement at age 6, with a yearly payment starting at age 18 to 25 (a certain amount,) then another certain amount on his birthday every year +4% yearly until death, then also a certain amount at age 30 (next year). At the time, I had been told that these payments would be tax free. Now Manulife is asking for tax forms, and he is worried he will have to pay taxes on him lump sum payment next year. Could you please explain how this works

  • Avatar Brian Poncelet August 28, 2011, 5:07 pm

    Hi Mimi,

    Without knowing any details in your son’s situation, it it hard to give an opinion.
    Have him contact me.


  • Avatar Brian Poncelet, CFP May 18, 2012, 12:11 am

    Hi FT,

    Since the market is going nowhere right now a number of people have expressed an interest in annuities.

    As you know interest rates are down and so is the payments. (annuity)

    Having said that, for people who believe rates will be higher in ten years and look to be in a position to consider annuities as a part of a strategy this may make sense if they consider the ” insured annuity”

    So for kicks I ‘d like to update the numbers based on today’s rates…which stinks! But after taxes it still beats any 4 – 5 percent GIC sold today!?

  • FT FrugalTrader May 18, 2012, 8:37 am

    @Brian, maybe it’s an idea to update the rates within the comments so that readers can compare to the original.

  • Avatar Brian Poncelet, CFP May 18, 2012, 3:26 pm


    I will get you some new #’s shortly.

  • Avatar Brian Poncelet,CFP September 2, 2012, 6:05 pm

    Hi FT,

    Sorry I forgot about the rates. For a 65 year old male annuities are 6% and 70 year it is 8%.

    I believe GIC rates seem to be around 2% for a five year term.

    The question is will interest rates be this low for another ten years? If one plans ahead gets permanent coverage while they are still young they have choices.

  • Avatar Lou November 8, 2012, 12:18 am

    Personal hardship has drastically affected my ability to earn an income, so annuities seems like a good idea. Can I buy an annuity using RRSP’s and stocks investments combined? I will be 55 next year.

  • Avatar Brian Poncelet,CFP November 8, 2012, 2:42 pm

    Answer is yes.

    However the payout 55 vs 65 will be less. If you can wait til later you are better off.


  • Avatar Bernie December 9, 2012, 3:14 pm


    I’ve attached a link to an RBC payout calculator for annuities. In your opinion do you think this calculator is an accurate representation? NOTE: It doesn’t give you the option to have purchases from both non-registered and registered monies.



  • Avatar Brian Poncelet,CFP December 12, 2012, 5:52 pm

    Hi Bernie,

    The Calculator seems ok but with RBC but I am surprised at the low payout when say I use a 65 male. you can switch the non-registered or registered to see what is taxable.

    The best is to get a quote from a bunch of companies.


  • Avatar ed January 19, 2013, 2:14 pm

    Do all annuities “expire” at the annuitants death(s). In other words, are there annuities that have a cash value at death that can be willed to children?

    I ask because I’d like to try and decide between accepting a lump sum rather than a company pension. The pension benefits expire at death.

    I’ve also been told that I’d have a hard time beating the income I’d earn from the company pension in any annuity. Agree?

    Thank you.

  • Avatar Brian Poncelet,CFP January 19, 2013, 8:33 pm

    Hi Ed,

    Great question(s). The answer if you wanted a steady pay going to say your wife or children even if you died early would be something like a 20 year annuity, which means the insurance company has to pay out for 20 years.

    There is no cash value in an annuity.

    The pension vs. an annuity… it depends on your age who the pension is from…say Air Canada vs. Federal Government also you really need someone to review the numbers guarantees etc.

    If you want some money to go to your children/partner etc. Then the best is to consider permanent life insurance.

  • Avatar Mike @ Annuity Rates July 12, 2013, 12:02 pm

    Hello Ed,

    I think the best way to answer your question is to meet with a financial planner that has access to a retirement planning software. He can run multiple scenarios to compare investments in a regular portfolio, pension plan and annuities. You already know how much you will get from your defined pension plan, then you need to request a quote for an annuity to know how much you will earn from it.Then, with those simulation, you will know how much return your portfolio must generate to match your pension plan or your annuity.

    The main advantage of a regular portfolio is the liquidity of your asset (e.g. you can withdraw additional amount at any time). On the other side, the return is not guaranteed (as compared to a defined pension plan or an annuity). Keep in mind that your defined pension plan works like an annuity for your employer. Since he has a bigger purchase power than a single individual, chances are he will offer you a better pension payment than any other annuities.



  • Avatar charlie acton July 21, 2013, 10:29 pm

    Concerning that the question on commissions was side-stepped. I do think people will investigate more transparent options in order to know what potentially motivates an advisor.

  • Avatar Ready Retire April 18, 2014, 10:26 am

    Hi Brian,

    Can you explain how to use whole life insurance to purchase annuity?

  • Avatar Brian Poncelet,CFP April 19, 2014, 12:56 pm

    Ready Retire,

    You should have the insurance in place years before consider buying an annuity.

    See insured annuity.


  • Avatar Elis November 6, 2014, 10:50 am

    Hi Brian,

    This article gives new perspective on annuities. So I thought I’d like to try this for my kid (my background, I’m 40 and I have very limited knowledge in investment but I do have RRSP, bonds and TFSA – I simply contribute to those very conservatively). 2 agents have so far introduced this to me (2 years apart) but both have said everything is tax-free because the contributions are after tax.

    But from reading this post, your (afticle) example implies the annuity is tax-free but as I read through the comments and your replies to the comments, I’m seeing the words like “taxable or taxed” and the sample (from Mimi) worries me that my kid (and/or I) may prefer something else that is same with annuities but non-taxable. Can you explain further or am I getting confused?

  • Avatar Brian Poncelet,CFP November 8, 2014, 11:19 am

    Hello Elis,

    In a nutshell I do not recommend annuities for kids or young adults.

    That said if you read Mimi statement ” a annuity settlement ”
    This means there was a settlement probably is a structured settlement by the courts. This would suggest a guaranteed payout (monthly for a certain period of time)

    Only a annuity can do that. In her case the taxes would be payable in the child’s name. Since this is and would have to be non-registered investment.

    If you are conservative and in a high tax bracket then there is other options which are much better than an annuity at a young age.

    Unless the annuity is held in a RRSP the funds are taxable.

    Let me know if this helps.

  • Avatar John K December 25, 2014, 11:26 am

    An aspect of annuities which I have not seen discussed much is using an annuity for income splitting. I am 65, and my wife is younger.

    I currently have about 400,000 in RRSP’s and 150,000 in a LIF.
    Due to wishing to invest about 100,000 in real estate in 2015, I am considering the following manoevre, but don’t know if it is possible:
    For taxation year 2015 I want to purchase a one-year annuity for 150,000 from my RRSP. I have been told, that since I turned 65 in 2014, I can purchase an annuity in my name, and the payments made each month to me will count as PENSION payments, and will qualify for INCOME SPLITTING. So of the 150,000 the portion attributable to my wife would be 75,000.
    My 2 questions are:
    1. Am I correct about the income splitting aspect?
    2. What is the shortest annuity term I can purchase? I was hoping a 1-year annuity is possible. Are shorter terms possible? Which company issues the shortest term annuity?
    I am willing to take the tax hit for taking the money out quickly (via the annuity) but it would be softened significantly is income splitting applies.

  • Avatar Brian Poncelet, CFP December 28, 2014, 12:09 am


    I am not sure what you are looking for here but I will try to answer it.

    You can split your income through annuities.
    You will not be able to buy a one year annuity. (Once you buy the annuity, the money is with the insurance company)

    You may also be able to make a joint election with your spouse or common-law partner to split your pension, superannuation, annuity, PRPP, RRIF (including life income fund) and SPP payments you reported on line 115 if both of the following apply:

    •you were both residents of Canada on December 31, 2013 (or were residents of Canada on the date of death); and
    •you and your spouse or common-law partner were not, because of a breakdown in your marriage or common-law relationship, living separate and apart from each other at the end of the year and for a period of 90 days beginning in the year

    To make this election, you and your spouse or common law partner must complete Form T1032, Joint Election to Split Pension Income. **

    **CRA website

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