Transcript: Annuities are a versatile option for estate planners
John Yanchus of Canada Life says annuities are increasingly popular in the current economic climate, and they have a lot going for them
- August 1, 2023 July 30, 2023
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive, and powered by Canada Life. For today’s Soundbites, we’re talking about annuities with John Yanchus, director of tax and estate planning with Canada Life. We talked about current trends in annuities sales, and how they can be best employed in client portfolios. And we started by asking about the aspects of annuities that are most misunderstood by clients.
John Yanchus (JY): This is an excellent question. I have two examples of annuity misunderstandings. The first one is that many people believe when they pass away, the remaining annuity payments or the initial principle is lost and kept by the life insurance carrier. There are many options available to ensure your initial principle goes to your loved ones or a named beneficiary instead. You can also choose to have that benefit paid with or without interest. The second example is many people believe annuities to be very inflexible. But there are multiple options available with all annuities to increase flexibility, like cashable annuities, and then the short-term rate protection feature, which allows one to increase the flexibility of an annuity.
Aspects that are commonly misunderstood by advisors.
JY: Many of the misunderstandings we mentioned are similar for advisors to a certain degree. But the features and guarantee periods are most misunderstood. The second misunderstanding is that annuities are available for all product lines, not restricted to one product. We have options for registered accounts, non-registered accounts, life insurance policies, GIOs, and everything in between. Many advisors restrict their thinking to one application only, and don’t think outside of the box.
Current strategies for designing and selling annuities.
JY: The use of an annuity is never all or nothing. It is something in between. The annuity serves to solve a problem or provide for a certain outcome within the planning. Second, the annuity is largely sold as a piece of the income pie, similar to CPP or OAS. A third strategy advisors may be able to take advantage of, is to consider reducing their commission to increase the client payment. This may be important to achieve a certain outcome or objective, or to win a client in a competitive scenario with another advisor. One of my favourite strategies is a settlement option form. This is a one-page form that goes hand-in-hand with the beneficiary designation, and can be changed at no cost, as long as this is done while you’re alive and of sound mind. This form allows me to determine how my beneficiaries receive their inheritance, almost like me still controlling from the grave. I can choose to provide my beneficiary with a lump sum, a term annuity, or a life annuity, or any combination of the three. Another interesting strategy is the concept of deferral. I could set up a deferred annuity today to start paying a cash flow in as much as 10 years in the future. Another very interesting strategy is where you have an annuity set up under accrued taxation but when the payments start in the future, you can request to have prescribed treatment from that point forward. Prescribed taxation equalizes taxation each year on that annuity up until life expectancy. The last strategy I wanted to mention briefly is the copycat annuity. This is a very complex strategy but, in a nutshell, when you are exploring the option to commute a defined-benefit pension plan, there is a potential annuity option available in which the total benefit of that pension plan is matched by the annuity payments, and the entire amount can be transferred into that annuity, tax deferred, until the annuity payments start. This can be a very effective to commute your pension and obtain the exact pension benefit without a large tax obligation arising from the non-eligible portion of the amount commuted from the plan.
And finally, what’s the bottom line for advisors who want to harness the power of annuities?
JY: I think the bottom line is annuities are very versatile and very useful in many scenarios. I would start thinking outside the box in different areas, where to use them or how to structure them. They can provide a variety of options or solve a lot of problems when it comes to many areas of tax and estate planning. And I think right now, with the increase in interest rates, the perception is that annuities are more inclusive and more, I guess, generous would be the right word. People are asking a lot more about them and right now annuities are definitely more popular for sure.
Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to John Yanchus of Canada Life. Visit us at investmentexecutive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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