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What is a Life Annuity?

July 13, 2017

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If you don’t know what a life annuity is, you’re not alone. In this article, we’ll look at what an annuity is, how it can be used in your portfolio and who should be using annuities.An annuity is an income for life. You trade an insurance company a lump sum and they guarantee you a monthly income for life. The best part is that there are no investment decisions to make and market volatility does not affect your income.

The insurance company takes on the performance risk and guarantees your income.

A life annuity is ideal if you’re not comfortable making any portfolio investment decisions, but want a better return on investment than what you’d get with your GIC. Insurance companies are able to create more income with your money because they pool mortality risks, so those who die younger subsidize those that live longer.

A life annuity isn’t for everyone, but they work really well for a lot of people. Many retirees will use an annuity to cover their fixed monthly expenses so they know each month they will always be able to pay their bills no matter how long they live.

Is a Life Annuity Right for you?

If the following applies to you, an annuity might not be appropriate:

  • You’re wealthy and there is no chance you’ll run out of money before you die.
  • You have a Defined Benefit Pension (this is a life annuity)

Annuities can work well in combination with your RIF or other retirement income plans.

Our goal would be to figure out what is most appropriate for you based on your retirement needs, access to capital, current interest rate environment, growth potential and risk tolerance.

It’s important to speak with a life insurance professional to help figure out your options.

How Much of a Life Annuity do you Need?

It depends on how much you need to retire. A common approach if you plan to retire at 65 is to work on withdrawing 4 per cent of your initial portfolio every year, plus inflation adjustments.

It’s important to note that you could easily run out of money if you only relied on GIC’s, Bonds and Equities. An annuity is a guaranteed steady income for life that will let you sleep at night. With no risk of depletion, your annuity will continue your income for long as you live.

When Should you Buy an Annuity?

We normally look at annuities as part of your overall retirement glide path and decumulation plan. At or near retirement, we assess the variables and decide if part of your portfolio should have a guaranteed amount of monthly income.

How to buy a Life Annuity?

Although annuities are an investment product, they can only be sold by insurance companies and cannot be bought at any bank. Using a broker is always the best choice so you can see a listing of which companies are paying the most at the time you’re ready to buy.

At Shelter Bay Financial Corp., we are annuity brokers and can help you build your retirement plan for a comfortable retirement without the worry of out living your money.

To find out more, please call us directly at 1.888.498.5288.

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