The variety of contract types complicates matters for those who are not insurance specialists or seasoned investors.
Brian Poncelet, an Ontario based financial planning expert, explains that a steady income of cash comes from several factors working together, like opting for the best products and strategies. “Many people considering their options for retirement income are introduced to the idea of annuities, but while the concept has existed since the days of the Roman Empire, it seems investors often struggle to grasp the specifics of the modern-day version of this product,” says Poncelet, who has written on the matter and continues referencing his clients to his article to this day.— Detailed planning and careful investment is needed in order to fully enjoy the perfect retirement life.
“Strictly speaking, annuities are not investments although they are typically described as such in marketing materials,” Brian Poncelet explains. Canada’s Financial Consumer Agency provides the following definition, “An annuity is a financial product sold by an annuity provider, such as a life insurance company, that will pay you guaranteed regular income.” The payments comprise both principal and interest, the latter being taxable although the amount due is deferred because the tax is spread over the life of the annuity. The chief attraction of this product is the guarantee it offers: the money will keep coming for as long as the policy buyer lives, while there is no such certainty with income derived from Guaranteed Investment Certificates (GICs), stocks, or mutual funds, Brian Poncelet points out. The factors that determine the annuity income are interest rates, gender (women have longer life expectancy), and the number of years an annuitant wants the payments guaranteed.
While the majority of people can easily grasp the overall advantages, the variety of contract types complicates matters for those who are not insurance specialists or seasoned investors. The choice should be guided by two key considerations: whether the annuity should transfer to a beneficiary after the buyer’s death, or the policyholder wants regular payments. In the latter case, the parties to the contract can arrange for income that increases or decreases at certain intervals. With a life annuity, a person is guaranteed income until they pass away, with the payments typically ceasing after death. However, the contract can include provisions that ensure continued reimbursement to a beneficiary or the annuitant’s estate, but the additional features will reduce the amount, Brian Poncelet explains. In the case of a term-certain annuity, income payments are guaranteed for a fixed period of time, meaning that a beneficiary or an estate will be entitled to the remainder of the funds should the buyer die before the term expires. Insurance companies also offer the so-called variable annuity, where a portion of the income is determined by the performance of an investment made on behalf of the buyer by the annuity provider. Therefore, this type carries an element of risk because the capital markets fluctuate, so the rates of return can affect the income. Given the intricacies of this financial product and the numerous features that can be incorporated additionally to maximize outcomes, potential annuitants are strongly advised to seek the help of experienced professionals.
Brian Poncelet is a Canada-based insurance expert and independent certified financial planner (CFP) with over 25 years of industry experience. Working alongside company leaders, managers, and self-employed individuals, he offers advice and support that allow them to improve cash flow efficiency, minimize taxes, implement protection strategies, and access retirement funding options. As a third-party administrator, he provides alternatives to traditional employee benefits arrangements, including healthcare spending, accounts, and administration. Brian Poncelet is focused on developing comprehensive plans and making recommendations that ensure his clients achieve the best outcomes and value.
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