Back to Back Annuities
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Questions and Answers
Q. Why are back-to-back annuities so popular today?
Pensioner's who depend on their savings for their retirement income are looking for higher returns than traditional GIC's and bonds with no risk. A back-to-back annuity can provide both and the guarantee that you cannot outlive your savings.
Q. What are the key benefits of a back-to-back annuity?
Q. What are the 5 important questions to ask yourself that will determine if back-to-back annuities are right for you?
Q. How safe is my annuity?
Annuities are among the safest investments around because they are financially backed by Canada's insurance companies, which in turn are backed by an organization called Assuris (www.assuris.ca). Assuris is the not for profit organization that protects Canadian policyholders in the event that their member life insurance company should fail.
Assuris' has a monthly income protection for annuities. If your life insurance company fails, your payout annuity policy will be transferred to a solvent company. On transfer, Assuris guarantees that you will retain up to $2,000 per month or 85% of the promised Monthly Income benefit, whichever is higher. Assuris is funded by the life insurance industry and endorsed by the Canadian government.
Q. How much of my portfolio should I allocate to a back-to-back annuity strategy?
With this strategy you give up liquidity and some flexibility, therefore it should be an important component of a larger investment plan. Depending on your age and net worth, 25% to 35% of your assets can be allocated using this strategy. You should always have enough cash on hand for emergencies and other opportunities.
Q. What are some of the important factors to consider before you purchase a back-to-back annuity?
Make sure you can qualify medically for the insurance portion. The annuity portion is permanent. You are giving up a lump sum of cash for a guaranteed income stream. Once it is implemented it cannot be changed. The annuity is not liquid. No access to your funds other than the income stream.
Q. What is the enormous mistake seniors make when investing in GIC's?
Investing in GIC's creates interest income. Interest income is taxed at the highest rate compared to dividend or capital gains income.
Q. What is the best age to apply for a back-to-back annuity?
Anywhere from ages 60-80. Applying for the insurance portion of this retirement strategy can also work well prior to age 60.
Q. What is the Golden Rule when buying a back-to-back annuity?
Make certain you can qualify for the life insurance portion first.
Q. Why is having a back-to-back annuity the best way to die?
You have been taxed your whole life, why pay taxes upon death? It is said that your biggest tax bill will be your final tax return. By purchasing a back-to-back annuity your life annuity income ends on death and all your assets in the annuity equal zero. That means zero assets for Revenue Canada to tax you on your final tax return. Even better the life insurance goes directly to your beneficiary tax free. If you're looking to die broke and leave your loved ones a large chunk of your hard earned assets, then this strategy is right for you.
Q. What if I have no children or loved ones that I want to pass on my estate to? Why would I want a back-to-back strategy?
The insurance portion of the annuity strategy can be left to your favourite charity. This allows for a non-refundable tax credit which reduces your federal tax payable dollar for dollar. With the non-refundable tax credit your net income increases substantially using the back-to-back strategy.
Q. Why isn't my bank or investment advisor telling me about annuities?
A. Commission structure, especially trailer fees could be the reason. They would rather sell you an investment such as a mutual funds which means bigger up front and trailer fee commissions attached. The more money you hold in an investment fund the higher the trailer commissions for your bank or investment advisor. Regardless if your investment makes or loses money, your bank and investment advisor continue to cash in on the trailer fees. Annuities pay a one-time commission with no trailer fees for the agent who sold you the annuity.
Q. Interest rates are low. Should I wait for interest rates to go up before I purchase an annuity?
Interest rates have been low in Canada since the early 1990's with no sign of interest rates increasing in the near future. However interest rates partially affect annuity prices. Each insurer calculates their own annuity rates using the following criteria:
Q. Is my annuity at risk from inflation?
A. An annuity can be purchased with an inflation protection index.
Q. How can I get the best back-to-back annuity rates on the market?
A. Give us a call. We shop the annuity and insurance markets daily for best rates.
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