Everything You Need to Know About Annuity Rates in Canada

Posted on April 29, 2021

Understanding Annuity Rates in Canada

Suze Orman, a bestselling author, believes that despite the popularity of annuities, they don't always make sense for everyone. If that's the case, then how do you know if you should buy one? What are annuities, anyway?

Annuities are contracts between an insurance company and policyholder that guarantee you will receive a payout when you meet a certain condition. There are several factors that go into deciding if an annuity is the right investment decision for you, and one of these factors is rates. 

Annuity rates in Canada result in a regular payout according to how much you save for your pension. In other words, for every chunk of money you pay in, you'll receive a percentage of it back later. 

In this guide, you will learn what annuity rates mean for your financial situation, and how exactly they work in Canada.

How Do Annuities in Canada Work?

Many people value annuities because they are a form of guaranteed income. Annuities are often used as a supplement to government payouts and life savings.

Annuities provide a level of financial security because they guarantee a minimum payout. You receive this income for the length of time you choose, which could be the rest of your life.

The provider you choose for your annuity will set the rate based on a number of factors. They will take into consideration the government grants they receive for annuities as well as interest rates and your health and life expectancy. There are several different types of annuities, though, that will change when and how much you get paid.

There are types of annuities that will gain interest on the money you put into an annuity, either at a fixed rate or based on the market. In the case that your money gains higher interest, you receive more-but never less than-your minimum payout.

Annuities are taxed in Canada based on a number of laws that address different types of income. Taxes will differ based on if you use registered or non-registered funds, what withholding options you choose, and if you're deferring taxes. You should consult a tax expert to learn more about what taxes you will pay.

While annuities are great for some people, they don't make sense for those who don't expect to live much longer or already have a substantial source of income ready for their retirement. Annuities can be expensive and the return might not be worth your investment.

What Is a Termed Annuity Rate?

A term certain annuity is an annuity that will only exist for an agreed period of time. These types of annuities can typically range from 5 to 30 years' worth of payouts. Even if you are still alive at the end of this period, you will no longer benefit from any income. 

Because term certain annuities won't depend on your life expectancy, your rates do not fluctuate according to your age and health. If you die before the term ends, however, you will be able to pass on any leftover payments to a beneficiary.

The Canada Revenue Agency offers a cap on the amount of taxed income from annuities, and you can take advantage of tax benefits according to which options you choose for your annuity. Simply, you can choose to pay taxes right away or defer them until you start receiving payments.

Is a Fixed Termed Annuity Rate Different?

Term certain annuities usually come with higher payouts because they are guaranteed to end after a fixed period. The provider does not have to be as careful about their rates because they know how much they will be expected to pay from the moment you sign the contract.

These annuities also won't differ in payouts according to your health because they do not provide the extra insurance benefits that you can get from life annuities. In other words, the provider will not raise their rates to help you compensate for higher medical bills

How Does a Life Annuity Work?

A life annuity differs from a term certain annuity because it is guaranteed to be paid out until your death. In return, most life annuities cannot be passed on to a beneficiary.

Providers will choose lifetime annuity rates based on your health and age. For example, the longer you are expected to live, the less a provider will want to pay you each month. With a lifetime $100,000 annuity purchased in your 60's, you could expect a little more than $400 a month.

The cost of premiums to pay into your annuity will depend on how many insurance add-ons you include in your annuity. The more insurance components, the more expensive your annuity will be. You can pay premiums on these annuities monthly, quarterly, semi-annually, and annually.

Straight Life Annuity

Straight life annuities are the least expensive option because they do not offer any insurance components. You will be paid the same throughout your life with no fluctuations based on your health.

What Are Joint Annuity Rates?

The exception to the rule of life annuities ending after the policyholder's death is a joint annuity. A joint and last survivor annuity will continue until both the policyholder and their beneficiary are dead. These annuities usually refer to spouses.

Joint annuity rates won't change after the death of the policyholder unless previously agreed. The tax burdens on the survivor will be less due to receiving monthly payments rather than a lump sum. 

The formula for these calculations equals out so that the cost equals the payouts over the term of the annuity. Because joint annuities last longer than the first policyholder, they are more expensive.

What Are the Best Annuities for Retirement?

Some people choose to buy fixed-term annuities to cover a gap in income rather than sustain them in retirement. Term certain annuities have an expiration date that could come before your death, so there is less financial security depending on the payments after retirement.

If you're looking for annuity payouts that will change to help accommodate frequent medical costs, which comes with getting older, you'll want an annuity that includes more insurance components. These annuities will be more expensive but will be flexible with your life situation.

You can choose more affordable life annuities, like straight life annuities, that offer no insurance components but will be guaranteed for the length of your retirement.

Finding the best annuity rate for retirement will ultimately be up to you. Your unique situation, including age, health, and other sources of income will change what you need and are willing to pay.

Where Can I Get an Annuity Quote in Canada?

You will need to find an annuity through a life insurance provider. You can choose to talk to someone over the phone, online, or in person. You should get several quotes to find the best annuity rates.

It's also an option to use an annuity broker as the middle man between you and life insurance providers.

Some life insurance providers and financial advisor websites even offer an annuity rates calculator. You will be able to type in your age, type of annuity, amount of money invested, and more in exchange for a rough estimate.

Current annuity rates in Canada for males start at around $340 a month and $315 a month for females with life annuities.

Annuity rates in 2021 are stagnant while the pandemic has caused the government to hold off on grants to life insurance providers. The rates might rise once the economy recovers significantly from COVID 19.

Is an Annuity Broker a Better Option?

To get a quote and sign up for Canadian annuities, you might consider an annuity broker. Annuity brokers work with several different providers and can help you find the best Canada annuity rates.

Brokers will be much more experienced with all the variables that go into calculating rates and how to choose one that benefits you the most. They will also be able to help you compare options, which can be hard to do with all the complexities and benefits.

Annuity Rates in Canada

Once you are familiar with your different options for annuities, you can assess your life situation and needs. In the end, you might decide that an annuity isn't right for you, but you should make an informed decision.

Annuity rates in Canada are currently stable but might go up soon. If you are looking for annuity rates advice, contact a financial advisor to start assessing your options.

If you are in need of further advice, especially about the best annuities in Canada, contact Insurdinary and get free quotes!

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