Chapter 14: Retirement Planning Flashcards
What are the 3 cycles that can be expected during retirement?
- Active years
- Slow down years
- Late years
What do annuities trade for guarantees?
Investment returns. When purchasing an annuity, you’re assuming a relatively low rate of return in exchange for a guaranteed stream of income.
What are the 2 basic annuity structures? How are they different?
Life annuity - can only sold by an insurance company, and is designed to provide income until the death of an annuitant.
Term certain annuity - pay benefits for a pre-determined amount of time based on the amount of money invested.
What happens if the annuitant of a term certain annuity dies with annuity benefits outstanding?
Normally has no beneficiary, so annuity benefits will pass on to the estate, and then to heirs. Insurance companies may allow a named beneficiary.
Why is there more risk involved a joint life annuity than a single life annuity?
The insurer takes on more risk as the annuity will have to pay until both annuitants die.
How do insurers calculate benefits for joint life annuities?
Benefits will be reduced since the insurer takes on more risk with more than one annuitant. The benefit will be based on the age of the youngest annuitant, and then reduce that benefit amount based on the age of the older annuitant.
If two 80 year olds purchase a joint annuity and have their benefit based approximately on the age of a single 75 year old for benefit purposes, what would a 60 year old and 80 year old purchasing a joint annuity likely have their benefit based on?
For joint annuities, the insurer uses the youngest age to determine the benefit amounts. They then reduce the benefit amount based on the second annuitant. In this case, their benefit would likely be based approximately on the age of a single 55 year old.
Which gender tends to obtain a higher life annuity benefit?
Men, as women tend to live longer.
What is an impaired annuity?
A type of annuity one can apply for if the annuitant’s health is failing and is based on a shortened life expectancy. Typically requires a doctor’s indication that life expectancy is around 3 years or less.
What are the (4) types of life annuities?
- Life straight annuities
- Life annuities with guarantees
- Joint and last survivor annuities
- Temporary annuities
What is a life straight annuity?
An annuity based on only one life. When the annuitant dies, benefits end. This type of annuity represents the least risk for the insurer and will pay a larger benefit than other types.
What is a life annuity with gurantees?
A life annuity with a guaranteed period (such as 5, 19, or 20 years) where an annuity benefit will continue to be paid to a beneficiary up to the end of the guarantee period. The benefit could be a lump sum or continuous annuity income.
What is a joint and last survivor annuity?
Life annuity with income provided until the last of two annuitants are deceased. These can be structured so the last survivor only received a reduced amount of income (such as 66.67%).
What is a temporary annuity?
A life annuity that pays until the earlier of the end of the term or the mortality of the annuitant (bridge benefits are a temporary annuity). This will provide higher benefits than a term certain annuity since the insurer is able to fund some of their promise with mortality credits.
Who is a life straight annuity appropriate for?
Typically for a single person in retirement with nobody depending on them financially. Not appropriate for someone who is concerned about the financial consequences of dying too soon.
What are the (2) features that can be added to an annuity?
- Commutability
- Indexing
What does a commutable annuity allow?
Allows the investor to commute the value built up in the annuity. The monthly annuity benefit will be less than that of a non-commutable annuity, but the investor can choose to access funds in the annuity during the accumulation phase.
What is the maximum indexed amount allowed within a registered annuity?
4% per year.
What is an accumulation annuity? What are 2 other names for it?
Also known as a deferred annuity or GIF. Deigned to allow the client to use the annuity to accumulate value prior to starting. Deferred annuities will often use an IVIC (seg fund) or GIC type of structure during the accumulation phase.
How are non-registered annuities taxed?
Income is based on a combination of return of capital and interest. The ROC is not taxed, while the interest is taxed as regular income.
What is an accrued rate annuity?
Non-registered annuity where as the annuity pays benefits, the amount of principal decreases because a portion of every payment is return of capital. Eventually, the amount of principal will be reduced to zero, resulting in a declining tax bill over time as less principal will be earning interest.
How does the taxation of a registered annuity differ than that of a non-registered annuity?
The registered annuity will produce a fully taxable stream of income, while a non-registered annuity allows for only a portion of the income stream (the interest portion) to be taxable. The remainder is return of capital.
What is a prescribed annuity?
When a non-registered annuity meets certain conditions, it is possible to use prescribed taxation (proportional taxation). The tax bill would be levelled out over the term of the annuity, rather than heavy upfront taxation and little to no taxation later on as the principal and interest decrease each year.
How is the death benefit of a registered annuity taxed (when purchased with RRSP, LIRA, RRIF proceeds)?
If taken as a lump sum, the full value of the DB is taxed to the deceased annuitant.
If taken as an income benefit by a spouse or CL partner, the spouse can elect to receive the ongoing income, taxable in the spouse’s hands.