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What are annuities?
An annuity is a contract that pays a set monthly income for a set period of time. With annuities, you make a lump sum investment to an insurance company and create a stream of income for yourself in the form of monthly payments.
How do annuities work?
When you purchase an annuity you purchase a guaranteed income that allows you to:
- Receive a monthly stream of income following the purchase of the annuity, defer it for a set period of time or save it for your retirement
- Select the period of time you wish to receive the income for: a set period of time or for your lifetime
- Choose fixed or variable monthly payments, depending on your risk tolerance
The amount you receive monthly depends on how much you purchase and the interest rates. Your advisor can explain how interest rates affect your monthly payment and the different ways annuities are structured.
What are bonds?
A bond is an interest-paying investment. Companies and governments issue bonds to fund operations, innovate and grow.
How do bonds work?
When you purchase a bond you become a lender - loaning money to a corporation or government entity, that promises to pay you interest for a certain period of time. The frequency and amount of interest you are paid depends on the terms of the bond:
- Long-term bonds usually pay higher interest
- Interest payments are typically paid semi-annually, annually, quarterly or monthly
Your advisor can help you learn about the different types of bonds available and how they work
What is a GIC?
A GIC is an investment issued by a financial institution such as a bank or credit union. When you purchase a GIC, you are lending the financial institution money for a pre-determined period of time, and the financial institution is promising to pay you back that money plus interest at the end of the period. Financial institutions usually offer many different types of GICs, including GICs that pay a floating rate of interest, GICs that pay interest monthly, quarterly or annually (instead of at the end of the period), and even GICs that pay interest that is tied to the performance of a stock market index. In addition, while an investment in most GICs is locked in for the length of the investment period, some GICs are redeemable before maturity.
How do GICs work?
A GIC allows you to earn interest on your money for a pre-determined period of time – ranging from six months to 10 years. However, if a GIC is issued in Canadian dollars and has a term of 5 years or less it may be eligible for deposit insurance from the Canadian Deposit Insurance Corporation.
What is life insurance?
Life insurance is a policy between you and an insurer that allows you to protect your assets, survivors and dependents from the financial burden of your death.
How does life insurance work?
If you have a life insurance policy, upon your death, your beneficiaries will receive a guaranteed payment of the value of your policy - to help them cover your funeral costs, manage debts and assist with supplementing your loss of income. The type of benefit your beneficiaries receive depends on:
- Coverage - The amount of life insurance you purchase is the amount that your beneficiaries will receive, upon your death. Life insurance benefit payments are tax-free.
To help you determine how much coverage you need you should consider:
- Financial needs - Your standard of living, your assets and liabilities, and how much money will be required to ensure your beneficiaries live a comfortable life when you are gone.
- Premiums - A premium is the amount you pay, usually on a monthly basis, for your life insurance coverage. Your premium is determined by the value of the policy and the duration of coverage, e.g., one, five, ten, 20 years or life.
- Type - There are two main categories of life insurance: term insurance and permanent insurance (including whole life and universal life).
What is term life insurance?
Whether you are looking to protect your family or your business, Term life insurance offers affordable and flexible protection you can customize to meet your temporary and growing needs.
The period (or term) of the coverage can be either a fixed number of years or to a set age (e.g. age 65).
How does term life insurance work?
Term life insurance generally offers:
- Short-term coverage for a fixed period of time, often one, five, ten or 20 years, or to age 60 or 65
- Structured premium options, based on the type of term life policy and the term
- Lower premiums than permanent life insurance policies, partly because term policies do not offer cash value or other forfeiting values
If you have a term life policy, and die during the term of your policy, your beneficiaries receive a:
- Death benefit - The proceeds of your coverage, in a lump sum payment, which are tax-free
What are mutual funds?
Mutual funds are pools of money contributed by investors with similar investment goals and managed by investment professionals. Mutual funds invest in different securities depending on the investment objective of the fund. For instance, some mutual funds invest in bonds and some invest in stocks, while others invest in both bonds and stocks.
The period (or term) of the coverage can be either a fixed number of years or to a set age (e.g. age 65).
How do mutual funds work?
Mutual fund investing offers four main advantages over individual investing:
- Professional full-time investment management, to choose and monitor securities
- Diversification to reduce the risk of “putting all your eggs in one basket”
- Liquidity that allows you to buy and sell mutual funds at any time
Convenience due to the mutual fund manager keeping all records and providing regular reports on your investments and the appropriate tax forms
What is a Registered Retirement Savings Plan?
An RRSP is a retirement plan that is registered with the Canada Revenue Agency (CRA) and that you or your spouse make contributions to. Because deductible contributions can be used to reduce your tax and because income or growth earned in the plan is usually exempt from tax while the funds remain in the plan, an RRSP acts like a tax shelter that provides you with a powerful incentive to save money for your retirement years.
How does a Registered Retirement Savings Plan work?
An RRSP is generally available to you if you have qualifying income. Once you contribute funds into an RRSP, any growth or income earned on the underlying investment will not be taxed until you withdraw that money. In addition, you can claim deductions for contributions you make to your RRSP.
You can contribute to an RRSP at any time. However, for contributions to be tax-deductible for any given year, they must be made on or before the 60th day of the next calendar year. This date typically falls on or about March 1.
Annual contributions to an RRSP are generally limited to your annual contribution limit. Unused deduction room from previous years can be carried forward. You can find your unused RRSP deduction room on your Notice of Assessment from the prior calendar year.
What is a Registered Retirement Income Fund?
A RRIF is a retirement income plan that is registered with the Canada Revenue Agency (CRA) and that receives cash and qualified investments from a Registered Retirement Savings Plan (RRSP). Income and growth on investments in a RRIF are tax free. However, a prescribed minimum amount must be withdrawn from a RRIF each year and all amounts withdrawn are taxable as income in the year of withdrawal.
How does a RRIF work?
You can continue to own and maintain the tax shelter on investments in an RRSP after the RRSP matures by transferring those assets to a RRIF. This must happen no later than the end of the year in which you turn 71.
A minimum amount prescribed by the government must be withdrawn from a RRIF each year. As you age, the minimum amount increases as a percentage of the value of the RRIF.
While there is a minimum withdrawal amount, there is no limit to the amount of the withdrawal up to the value of the RRIF. Withholding tax will be held back on certain withdrawals, but do count as tax payable in the year of withdrawal.
What are segregated funds?
A pool of investments held by the life insurance company and managed separately (i.e. segregated) from its other investments. If you buy a variable insurance contract, sometimes called a segregated fund policy, the value of your policy varies according to the market value of the assets in the segregated funds.
How do segregated funds work?
Unlike mutual funds, segregated funds are structured as an insurance product. Investing in segregated funds provides many insurance backed benefits such as:
- Maturity guarantee—upon maturity, 75% to 100% of your investment is guaranteed back to you.
- Guaranteed death benefit—your beneficiary is paid a guaranteed amount of money upon your death, even if the value of the asset, at the time of your death, is less than the guaranteed amount.
- Creditor protection—your investment may be protected from creditors.
What is a TFSA?
A Tax-Free Savings Account is a flexible, general-purpose savings vehicle that allows you to make contributions each year and to withdraw funds at any time in the future.
How does a TFSA work?
A TFSA provides you with a powerful incentive to save by allowing the investment growth to accumulate and be withdrawn tax free. However, unlike an RRSP, you cannot claim a tax deduction for contributions you make to a TFSA.
Starting in 2009, all Canadian residents who are 18 years of age or older can contribute a legislated dollar maximum per year a TFSA. If you do not contribute or do not contribute the full amount, the unused amount will carry forward indefinitely.
Also, if you withdraw money from your TFSA, the amount withdrawn will be added to your contribution room in the next calendar year.
What is a LIRA?
A Locked-in Retirement Account (LIRA) is a type of registered pension fund in Canada that does not permit withdrawals before retirement except in exceptional circumstances. The locked-in retirement account is designed to hold pension funds for a former plan member, an ex-spouse, or a surviving spouse.
Cash withdrawals are not permitted while the funds are locked in. Pension funds that are transferred to a LIRA can be used to purchase a life annuity or can be transferred to a life income fund (LIF) or a locked-in retirement income fund (LRIF).
Once the fund's beneficiary reaches retirement age, the life annuity, LIF, or LRIF provide a pension for life.
How does a LIRA work?
A LIRA may be created to hold funds that are transferred from a pension plan for a variety of reasons. The beneficiary may have left the job. The fund may be split with a divorced spouse, or the beneficiary may have died, leaving the fund to an heir.
A Registered Retirement Savings Plan (RRSP) can be cashed in at the owner's discretion. The LIRA does not have such an option.
What is a LIF?
A life income fund (LIF) is a type of registered retirement income fund (RRIF) offered in Canada that can be used to hold locked-in pension funds as well as other assets for eventual payout as retirement income. A life income fund cannot be withdrawn in a lump sum. Owners must use the fund in a manner that supports retirement income for their lifetime. Each year's Income Tax Act specifies the minimum and maximum withdrawal amounts for RRIFs, which encompasses LIFs. The Income Tax Act’s RRIF stipulations take into consideration fund balances and an annuity factor.
How does a LIF work?
Life income funds are offered by Canadian financial institutions. They provide individuals with an investment vehicle for managing the payouts from locked-in pension funds and other assets. In many cases, pension assets may be held but not accessible if an employee leaves a firm. These assets, usually called locked-in assets, can be managed in other investment vehicles but may require conversion to a life income fund when the owner is ready to begin taking withdrawals.
Life income fund payouts are determined by a government formula which applies to all types of RRIFs. Most provinces in Canada require that life income fund assets be invested in a life annuity. In many provinces, LIF withdrawals can begin at any age as long as the income is used for retirement income. Once an investor begins taking LIF payouts they must monitor the minimum and maximum amounts that can be withdrawn. These amounts are disclosed in the annual Income Tax Act, which provides stipulations pertaining to all RRIFs. The maximum RRIF/LIF withdrawal is the larger of two formulas, both defined as a percentage of the total investments.
The financial institution from which the LIF is issued must provide an annual statement to the LIF owner. Based on the annual statement, the LIF owner must specify at the beginning of each fiscal year the amount of income he or she would like to withdraw. This must be within a defined range to ensure the account holds enough funds to provide lifetime income for the LIF owner.
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