What to Know About Annuity Rates in Canada

An annuity is a fixed-term income that lasts for several years, or the rest of your life.

For this reason, an annuity gives you peace of mind knowing that your money will not run out before you pass away.

If you are planning to invest in an annuity, this post is for you. We discuss how fixed annuities work, factors that impact annuity rates in Canada, the best annuities for retirement income, and more. So, let’s get started.  

How do Fixed Annuities work in Canada?

Annuities are popular because they provide a steady stream of income. Many people use them to supplement their retirement savings and government payouts.

A fixed annuity is a great way to ensure your financial security after retirement as you receive a guaranteed minimum payout. You can set up payments for a specific period or the rest of your life.

Your annuity rate will be set at the time of application. Several factors affect fixed annuity rates, such your life expectancy, your health, gender, age, the amount of cash you provide initially, the length of your annuity policy, interest rates, and more.

There are many different types of fixed annuities available, and when you start receiving payments and how much you will receive, depends largely on the type of annuity you choose.

The funds you deposit in an annuity earn interest rates at a fixed or variable rate. The latter option gives you a chance to generate bigger profits, but there is some degree of risk involved. If things do not go as planned, you could lose money.

How much tax you pay on your annuity depends on whether you purchased it with registered or non-registered funds, whether you are deferring taxes, and the withholding options you selected. Consider speaking to a tax advisor to find out how much you will pay in taxes.

For some people, a fixed annuity is a good option, but it is not for everyone. If you have enough savings or have a short life expectancy, it may not be the right retirement savings vehicle for you. Fixed annuities can be complex and expensive, and the returns might not always match investment returns.

Annuities are very complicated life insurance products and hence, it is recommended to speak with a professional before getting one.

How is an Annuity Rate Determined?

The following factors affect the annuity rates in Canada:

Age

The older you are, the more income you will receive at the start of your fixed annuity. This is because you are not expected to live as long.

Health

When you apply for a fixed annuity, the annuity rates provider will want to know if you have any serious health issues. Underlying health problems can shorten your lifespan, so if you have a serious illness you are likely to receive a higher annuity income.

Gender

Gender impacts annuity rates. Given that women live longer than men, it is no surprise that they receive less income from annuity.

Length of your annuity policy

When you sign-up for a term annuity, you can choose how long you want to receive the payments. The longer the payout period, the smaller the monthly annuity rates income and vice-versa.

If you take out a life annuity, you have the option to keep the payments coming after your death. After you pass away, the annuity provider will issue the fixed annuity payments to your spouse, children, or estate. The longer you want annuity payments to continue after you pass away, the less money you will receive every month while you are alive.

The deposit amount

With an annuity, much like most things in life, you get what you pay for. The more money you put into it, the greater the monthly income.

Interest rate

The higher the interest rates are when you buy the annuity, the larger the payment you will receive. A lower interest rate results in the opposite.

Add-ons

A basic annuity that covers one individual will provide the highest income. Any options you add (such as a joint or survivor option) will reduce the income.

Termed vs. Life Annuity Rates

Termed Annuity

A termed annuity pays a guaranteed income for a specific period, chosen by you at the time of purchase. The bigger the payout period is, the more you will receive each month.

If you die before the end of the term, the provider will make the remaining payments to your beneficiary. This can be any person of your choice, such as your spouse or a child, or your estate. Once the term expires, the fixed annuity contract terminates, and no further payments are issued. Since the payout period is fixed, a term annuity’s rate does not fluctuate according to your health and age.

Life Annuity

Life annuity is an insurance contract that pays guaranteed income to the annuitant for life, however long they live. Typically, the monthly annuity payments are not passed on to a beneficiary. So, the contract ends with the annuitant’s death.  

In the case of an annuity, the provider calculates your annuity rates based on your age and health. The longer you are expected to live, the smaller the monthly cost will be. All else being equal, a healthy person will receive smaller monthly payments than someone with a life-shortening illness.

Some life fixed annuities let you add riders, usually at an extra cost. Riders provide you with extra features excluded in the original contract, but they can push your premiums up. Also, not all riders are the same, so it is important you understand how they work, and which ones might be right for you. Before you select a rider, make sure its benefits justify the cost. Keep in mind the more add-ons you pick, the costlier your annuity will be.

If you do not need any riders and want the payments to continue after death, a straight life annuity (also known as a single life annuity) may be better for you. It provides guaranteed lifetime income, but the monthly payments end upon death. It is a good option for all those who want a fixed annuity to provide payments for life but do not need to financially support their loved ones after death.

Unlike a single-life annuity, joint and survivor annuity does not end when the policyholder dies. Instead, it continues to make monthly annuity rate payments as long as one spouse lives.

The joint and survivor annuity is designed for couples and has the obvious advantage of providing a regular stream of income if one partner lives longer than expected.Say you are the sole income earner in your household, for example. If you pass on first, the annuity ensures your surviving spouse will have reliable income as long as they live.

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Which Annuities are the best for retirement?

Since a life annuity provides payments for life, they can help ensure you do not outlive your money. In contrast, term annuities come with an expiry date and, as such, are not the best option for retirement income planning. You may find yourself without sufficient funds in old age if you live longer than expected.  

If you are the primary earner, a joint and survivor annuity is a good fit. Because payments continue as long as one of the annuitants is alive, it is a good way to provide for your spouse if they outlive you.

On the other hand, if your spouse does not depend on your income for their financial well-being, or if you are single, consider setting up a single-life annuity plan.

Fixed indexed annuities may be a good option as they are deferred and are meant to be long term savings options. Fixed index annuities also offer less risk than a variable annuity.

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 Fixed Annuity rates for Men by age and company (10 year guarantee)

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 Fixed Annuity rates for Women by age and company (10 year guarantee)

Conclusion

An annuity is a legally binding contract between you and an insurance company. In exchange of a lump-sum payment or a series of payments, the latter promises to issue your regular payments, either for a fixed duration or life.

Besides the type of fixed annuity you select, many factors affect your annuity rates, including your age, gender, health, and the amount of money you deposit. Generally speaking, a life annuity is a better option for retirement income because it ensures you will not outlive your money. If you have any questions regarding fixed annuities, which insurance company to go with, or what type is right for your unique situation, a Dundas Life expert can help you.