What is an Immediate Annuity?
Think of it as a mortgage in reverse. In the case of a mortgage, the bank or trust company gives the client the amount of money required to buy a house - say $200,000 and the client in turn repays the $200,000 plus interest over a specified period of time.
An immediate annuity is just the reverse. A client gives the Life Insurance Company $200,000 and the company in turn pays the client back the $200,000 plus interest for life (in the case of life annuities) or for a specified period of time (in the case of term certain annuities).
The benefits begin one period after the annuity is bought (for example, in a monthly annuity, one month after the annuity is bought).
Why do people buy Immediate Annuities?
- Annuities supply a guaranteed income flow for life or if the owner of the contract so desires, his or her spouse’s life as well.
- There is no management required with a Single Premium Immediate Annuity.
- Annuities are worry free.
What are Immediate Annuity Payments used for?
They could be used for some of the following:
- To pay for the day-to-day living expenses of retired Canadians.
- For savings.
- To fund a child or grandchild’s education through a Two Step investing approach.
- To pay an insurance premium.
Can Immediate Annuities be bought with Registered and Non-Registered Funds?
Yes. If the funds which purchase the annuity are registered, tax is paid annually only on the income received each year.
If the funds which purchase the annuity are non-registered, the interest portion of the payments are taxed each year.
What type of Annuities are Available?
A. Life Annuities
- Without Guarantees
You can have a life annuity with no guarantee on the number of payments that you will receive - as long as you are alive you will receive payments. As soon as you die the payments cease.
- With Guarantees
In this situation the payments are guaranteed for a specified period of time - even if you die. Guarantee periods can be from 5 to 25 years. If the funds, which purchased the annuity, were registered, the guarantee period cannot be greater than to a client’s age 90.
B. Joint Life Annuities
- These annuities can be purchased with or without guarantees.
- Payments can be reduced to the surviving spouse on death.
C. Term Certain Annuities
- Term certain annuities have payments which are made for a specific period of time - even if you die.
- The terms available are from 5 to 25 years (if the annuity is purchased with registered monies the term must run to the policy owner’s age 90).
- Term Certain annuity payments can be level for the term or indexed (4% maximum if the funds are registered, no maximum if the funds are non-registered).
What is a Prescribed Annuity?
These are Annuities purchased with non-registered funds. The payments are made up of principal and interest. The owner of the annuity is taxed only on the interest portion of each payment received during a calendar year. The Prescribed Annuity effectively spreads the tax impact out over the life of the contract by keeping the taxable portion - the interest portion, level throughout.
What is a Non Prescribed Annuity?
Like the Prescribed Annuity discussed above, these are annuities purchased with non-registered funds. Unlike the Prescribed annuity, the interest portion of each payment is not kept level throughout the contract. In fact, it is highest in the early years, declining yearly throughout the life of the contract.
Can the Life or Term Certain Annuity Payments be altered once the Contract is started?
Not usually. Indexing of the payments is allowed but must be chosen at point of sale. However, if the funds, which purchase an annuity are registered, the indexing is restricted to 4% each year. If the funds, which purchase the annuity are non-registered, the indexing level is potentially unlimited.
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