Using annuities for other financial planning goals
In addition to providing a guaranteed income, annuities can be used for 2 other financial planning goals:
- To provide money for your beneficiaries or estateEstate The total sum of money and property you leave behind when you die.+ read full definition
- To leave a gift to charity
1. Money for your estate: An insured annuity
An insured annuityAnnuity A contract usually sold by life insurance companies that guarantees an income to you or your beneficiary at some time in the future. An annuity is a contract with a life insurance company. When you buy an annuity, you deposit a lump sum of money, and the insurance company agrees to pay you a guaranteed…+ read full definition is a life annuityLife annuity A life annuity gives you a guaranteed regular income for life. Payments usually stop when you die, and no money will go to your estate. You may choose to add an option that allows your spouse, beneficiary or estate to continue to receive your payments after your death.+ read full definition combined with a life insurance policyInsurance policy A written contract for insurance. It describes how long you are covered, what you are covered for, any part that you have to pay (the deductible) and what you will pay for the insurance (your premium).+ read full definition. You get a steady stream of income for life – and your beneficiaries receive a lump sum amount at your death.
Here is how it works:
- Buy the annuity – You buy a prescribed life annuity with a lump sum from your non-registered money.
- Receive taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition-efficient income – Some of the annuity income is interest income, which is fully taxable. The rest is not taxable. This generates higher after-taxAfter-tax The money you have left after you pay taxes on money that you made working or investing.+ read full definition income than investing your money in a fully taxable investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition – like a GIC.
- Pay life insuranceLife Insurance Insurance that pays cash to your family or other beneficiary after your death. This can give them income and help pay your funeral and other final costs.+ read full definition premiums – A portion of the annuity income is used to make premium payments on a life insurance policy with a value equal to the cost of the annuity.
- Provide cash for beneficiaries – At your death, your beneficiaries or estate receives a tax-freeTax-free Money that you do not pay tax on.+ read full definition lump-sum paymentLump-sum payment A large one-time payment of money.+ read full definition from the insurance policy.
Get advice before you buy
Consult with a financial advisor before buying an insured annuity or charitable gift annuity. These are specialized strategies and are only advantageous in certain situations.
2. Money for charity: A charitable gift annuity
A charitable annuity can be an effective way to generate retirement income and support a charitable cause.
Here’s how it works:
- Make a lump-sum donation to a charity – The charity uses this money to buy an annuity from an insurance companyInsurance company A company that sells insurance products. Some companies sell only life insurance. Some sell only property insurance. Others sell all types of insurance.+ read full definition on your behalf.
- Receive a tax receipt – You get a donation receipt for the difference between the purchase price of the annuity and the total income from the annuity that you’re expected to receive.
- Receive tax-efficient income – You receive guaranteed monthly payments, which are taxed either partially or not at all depending on your personal circumstances.
Guaranteed Minimum Withdrawal Benefit (GMWB)Guaranteed minimum withdrawal benefit (GMWB) Guaranteed minimum withdrawal benefit (GMWB) products are a combination of investments and insurance. This is known as a variable annuity. With GMWB products, you get a guaranteed minimum income from your savings each year – starting as early as age 50 for some products. They also provide the potential for investment gains to help increase…+ read full definition products
GMWB products are a type of annuity that provides guaranteed retirement income that can increase with investment gains in your portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition and with certain bonus features. Learn more about GMWB products.
2 key points
- Insured annuity – lifetime income for you and a lump-sum payment to your beneficiaries at your death
- Charitable gift annuity – retirement income for you and support a charitable cause