Patricia Michon

In this article, Patricia Michon, Assistant Vice-President, Guaranteed Wealth Product Management, Individual Insurance and Wealth, Sun Life Financial, discusses why life annuities could be part of clients’ retirement income portfolios.

Registered retirement income funds (RRIFs) do just what the product name suggests: provide a good source of retirement income. But what if a client lives longer than the RRIF payments last?

You’ll want to help ensure your clients won’t run out of money in retirement.

We know Canadians are living longer, and that those aged 65 may need retirement income to last 20, 30 or more years.1 Many Canadians — both retired and not-yet-retired — are afraid they’ll run out of money.2

Did you know?

  • Nearly half (48%) of people surveyed in an Angus Reid poll agreed with the statement: “I’m worried about my money lasting my lifetime.” Almost one in five (19%) strongly agreed.
  • Amazingly, almost three-quarters (74%) of those not-yet-retired agreed with that statement.

You can provide a time-honoured solution to ease those fears and give clients peace of mind. Whether clients are affluent or not, annuities can provide satisfaction and happiness.3

  • Satisfaction is highest among those with high levels of wealth and income who are very healthy and who annuitize their income.
  • Among retirees with similar wealth and health characteristics, those with annuitized incomes are happiest.

Moving some money from clients’ RRIFs to life annuities provides lifetime guaranteed income. The following case study illustrates an example of the benefits of this strategy.

  • 64-year-old male with $400,000 in RRSP savings and $400,000 in non-registered investments. The registered portfolio is primarily invested in fixed income investments.
  • $250,000 from the registered portfolio is used to purchase an annuity.
  • Annual income from the annuity will be $15,113 before tax and $10,579 after tax, paid for as long as the client lives.

Comparing the life annuity to a RRIF holding a GIC, you can see that the RRIF payments end before age 90, while the annuity’s income remains the same to age 105 and beyond:

life-expectancy-chart with comparison of annual income vs age

At 3.0% interest, the GIC’s after-tax income will be able to match the annuity up to age 87 — but only the annuity income is guaranteed for life.

Sun Life Financial’s updated Annuity calculator helps clients understand how much they might expect to receive from an annuity and compare it to the income they could receive from a RRIF that is invested in GICs or other investments.

The key advantage life annuities provide is that the income continues, regardless of how long the client lives.

Countering objections to life annuities

You and your clients may have heard or read reasons that may stop them from considering a life annuity as a source of retirement income. Those objections don’t stand up under close analysis.

Myth #1 – Never buy an annuity in a low-interest-rate environment.

Waiting for interest rates to rise forgoes locking in basic income now and could expose assets to market volatility. See the Buy Now Buy Later tool for examples of why clients shouldn’t wait to buy an annuity. Also, now that interest rates appear to be on the rise in Canada, bonds in a retirement income portfolio could underperform. Bond fund underperformance could occur at a time when clients need to withdraw money to support their income, with no chance of recovery in this situation.

Interest rates do affect payout annuity (including life annuity) income, but they aren’t the only factor that determines the annuity income. For example, an interest rate increase from 2.0% to 2.5% does not mean a 25% increase in income.

Myth #2 – Don’t give money to an insurance company just to get it back.

Clients could wonder about the logic of giving their money to an insurance company, which would then give it back. Perhaps they haven’t considered how soon they’ll actually get their principal back. The answer might surprise them:

break-even-points of life annuity

*Based on $100,000 registered life annuity, with a 10-year guaranteed period, no indexing. Illustrations generated September 12, 2017. Some clients choose a guaranteed period to cover the possibility of dying before they break even (or, in other words, get their full premium back); however, a 10-year guaranteed period is the most popular.

All the break-even points in the chart above occur on or before the average life expectancies for the corresponding ages. Your clients will be happy to know that after they break even, their payout annuity income continues for the rest of their lives.

Getting the original premium back and benefitting from additional income payments from the insurer transform longevity risk into longevity reward.

Myth #3 – Your money is wasted if the life annuity owner dies soon after buying it.

A life annuity provides annuity payments as long as the annuitant (or annuitants) are alive. Choosing the guaranteed period option for a life annuity or joint life annuity ensures the insurance company will pay a death benefit.4 Clients choose the length of the guaranteed period when they buy the annuity; the longer the guaranteed period selected, the lower the income payments.

If income has started and the annuitant or, in the case of a joint life annuity, the last surviving annuitant dies during the guaranteed period, the insurance company pays a death benefit.5 It’s important to note that with the guaranteed period, if the annuitant or last surviving annuitant dies after the end of the guaranteed period, income payments stop and the insurance company doesn’t pay a death benefit.

The source of premium may also restrict the minimum and maximum guaranteed periods available.6

Myth #4 – Avoid buying a life annuity, because they have no liquidity.

Generally, it’s best for clients to include a life annuity as only a portion of their retirement income portfolio. Calculate the fixed expenses required at retirement and subtract the expected CPP/QPP, OAS and defined benefit pension plans (DB) amounts. That will help you calculate how much income your clients will need from a life annuity to cover the rest of their fixed expenses and fill the basic income gap:

retirement-plan-bargraph showing income and basic needs gap

Remind your clients that if they invest in safe, low-interest investments, rather than market-based products, they’ll forgo higher potential returns from products such as mutual funds. Conversely, if they invest only in stocks, they could be setting themselves up for losses if market values decline, especially in the years right before or right after they retire.

Creating an investment portfolio with a mix of products, including guaranteed lifetime income from a life annuity, allows the client to reduce the fixed income portion of their remaining investments to provide growth and still have access to money. Based on your clients’ risk tolerances, financial goals, and life situations, you can help them choose the most suitable investments and how much of their savings to put into each product.

Myth #5 – Annuities are a waste of advisors’ time, since they get only one-time commissions.

Acting in clients’ best interests builds relationships and can help position you as their trusted retirement income specialist. By including an annuity, you can help clients develop a customized plan that meets their personal objectives, respects their risk tolerance, and provides the following key benefits:

  • Peace of mind – clients have income for life, without having to worry about investment risk or ongoing investment and management decisions.
  • Flexibility – clients can purchase an annuity with money from many different sources. Annuities provide many options, including guaranteed periods, inflation protection with indexed rates and single- or joint-life contracts.
  • Simplicity – it’s a single cash payment with no ongoing investment decisions, benefitting both clients and advisors. You don’t have to service the annuity.
  • Security – buying an annuity could be part of an integrated strategy to convert clients’ retirement assets into the guaranteed stream of income they’ll need to enjoy retirement.
  • Stability – market volatility doesn’t affect annuity income, an important reason annuities are an attractive retirement income option.
  • Sustainability – clients won’t run out of money to cover their basic needs in retirement, with the guaranteed lifetime income from a life annuity.

A good place to start

If beneficial to the client’s financial situation, suggest moving a minimum of 25% of retirement income assets to a life annuity. The other 75% could be invested for growth and liquidity.

25% guranteed lifetime income 75% other income

Watch the video Getting ready for retirement to see an explanation of this solution.

A life annuity is an insurance contract that guarantees clients will receive income payments for life, no matter how long they live. After they’ve purchased their annuity, they’ll never have to worry about how that money is invested or how long their income will last.

For more information about annuities and retirement income strategies, contact a member of your Sun Life wealth sales support team. When it comes to annuities, you can be confident in our knowledge; Canadians have made Sun Life Financial #1 in annuity sales for over five years.7

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1 Life expectancy continues to rise for Canadians aged 65. For males who reached age 65 in 2015, they could expect to live another 21.3 years, up by 0.2 years from 2012; females who reached age 65 in 2015 could expect to live another 23.7 years, up by 0.2 years from 2012. Actuarial Report on the Old Age Security Program, Office of the Superintendent of Financial Institutions, August 16, 2017.
2 The bullets in the following box are from “Retirement in Canada: Lots to enjoy about ‘golden years,’ but financial worries loom large,” Angus Reid, 2015.
3 The following two bullets are from “Annuities and retirement happiness,” Willis Towers Watson, September 2012.
4 The insurance company pays a death benefit in this situation if income has started and the annuitant or both annuitants die during the period selected.
5 See Death benefit under Product details for an example of details from Sun Life Financial.
6 See examples from Sun Life Financial of sources of premium, types of annuities that can be purchased, and the minimum/maximum period for income.
7 LIMRA results, 2012-2016.

Patricia Michon is Assistant Vice-President, Guaranteed Wealth Product Management, Individual Insurance and Wealth, at Sun Life Financial. Patricia is dedicated to the pricing and product management of guaranteed wealth solutions, including annuities and guaranteed deposit products. She has 16 years of experience in the insurance industry across a variety of areas: product management, pricing, and financial reporting and analysis. Patricia has a Bachelor’s degree in Actuarial Science from the University of Waterloo and is a Fellow of the Society of Actuaries and the Canadian Institute of Actuaries.