8.4 Other Annuity Types: Deferred, Indexed, Variable, Joint First-to-Die & the Insured Annuity
Key Takeaways
A joint first-to-die annuity stops (or drops) at the first death and pays more than a joint and last survivor annuity, which continues until the second death.
A deferred annuity starts payments later; the advanced life deferred annuity (ALDA) lets registered savings start as late as 85, up to the lesser of 25% of qualifying savings and $180,000 (2026).
Locked-in money from a DC pension or LIRA can buy only a life annuity with unisex pricing; maturing RRSPs can buy a life annuity or a term-certain annuity to age 90.
An insured annuity pairs a prescribed life annuity with permanent life insurance on the same life, giving higher after-tax income while replacing the capital for heirs at death.
Annuity payments depend on the guarantees chosen, the annuity rate, the length of the benefit period and any withdrawal rights; early withdrawals from deferred annuities may carry a market value adjustment.
Other Annuity Types and the Insured Annuity
The curriculum classifies annuities six ways. Earlier sections covered life annuities with guarantees, refund annuities, term-certain annuities, impaired annuities and prescribed taxation. This section completes the list.
1. By Type of Contract
| Type | How it pays | Use |
|---|---|---|
| Single life | For one person's lifetime | Single clients, or a spouse already protected |
| Joint and last survivor | Until the second death, at 100% or a reduced percentage (for example 60%) after the first death | Couples who need income for the survivor |
| Joint first-to-die | Stops (or drops sharply) at the first death | Uncommon; higher income while both are alive, suitable only if the survivor has other income |
| Registered | Bought with RRSP, RRIF or locked-in money; fully taxable payments | Turning registered savings into income |
| Non-registered | Bought with after-tax money; only the interest portion is taxable | Prescribed or accrual taxation (see chapter 9) |
| Group annuities | Bought by a pension plan or employer for a group of retirees, or offered through a group plan | Defined benefit plans transferring pension risk; DC plan members at retirement |
Because a joint first-to-die annuity has the shortest expected payment period, it pays the highest income of the joint options; a joint and last survivor annuity at 100% pays the lowest.
2. By Need for Income
- Immediate annuity: payments start within one payment period of purchase.
- Deferred annuity: payments start at a future date chosen at purchase, while the premium accumulates. A registered version, the advanced life deferred annuity (ALDA), can be bought with RRSP, RRIF, DPSP or DC pension money and can defer payments until as late as the end of the year the annuitant turns 85. The lifetime ALDA limit is the lesser of 25% of the qualifying registered savings and a dollar limit ($180,000 for 2026). An ALDA protects against longevity in very old age and reduces the RRIF minimums in the meantime.
- Indexed life annuity: payments rise each year with the Consumer Price Index or at a fixed rate (for example 2%). The starting payment is lower than a level annuity.
- Variable annuity: payments vary with the performance of underlying investment funds. In Canada, the closest common product is a segregated fund contract with a guaranteed lifetime withdrawal benefit.
3. By Source of Capital
| Source | Rules |
|---|---|
| Accumulation annuity | A deferred annuity or guaranteed interest annuity (an insurance GIC) that builds savings, with a named beneficiary and potential creditor protection |
| Defined contribution pension plan or LIRA transfer | Locked-in money can only buy a life annuity, priced on unisex mortality and, for a member with a spouse, normally in joint and survivor form unless the spouse waives |
| RRSP maturity transfer | By the end of the year the annuitant turns 71, an RRSP can buy a registered life annuity or a term-certain annuity to age 90 (or to 90 of a younger spouse) |
4. By Need for Estate Planning: The Insured Annuity
An insured annuity (also called a back-to-back annuity) combines two contracts on the same life:
- A prescribed life annuity bought with non-registered capital, giving high, mostly tax-free cash flow.
- A permanent life insurance policy (term to 100 or whole life) for the same amount as the capital, paid by part of the annuity income.
At death the annuity stops, but the insurance pays its death benefit tax-free to the beneficiaries, so the capital is restored for the heirs.
Illustrative comparison (assumed quotes for a healthy 72-year-old with $500,000 and a 43% marginal tax rate):
| GIC at 4% | Insured annuity | |
|---|---|---|
| Annual cash flow | $20,000 interest | $44,000 prescribed annuity |
| Taxable portion | $20,000 | $8,000 |
| Tax at 43% | $8,600 | $3,440 |
| Life insurance premium | None | $22,000 |
| Net annual income | $11,400 | $18,560 |
| Paid to heirs at death | $500,000 through the estate (subject to probate) | $500,000 death benefit to named beneficiaries |
The insured annuity works only if the client qualifies for life insurance at a reasonable price. It is irrevocable, the income is level (inflation risk), and both contracts depend on the insurer (Assuris protects within its limits). A CISRO sample question makes the trade-off clear: for a 68-year-old worried about living 30 more years and about inflation, neither a plain life annuity nor an insured annuity protects purchasing power; splitting the money between a life annuity and a balanced fund does.
5. Factors Affecting Annuity Payments
- Guarantees: a guarantee period, refund feature or survivor percentage lowers the payment.
- Annuity rate: set by long-term interest rates at purchase and locked in for life; age, sex (for non-locked-in money) and health also matter.
- Length of the benefit period: a longer term-certain period or a younger annuitant means smaller payments.
- Withdrawal rights and market value adjustment (MVA): deferred annuities and guaranteed interest annuities may allow early withdrawal, but if interest rates have risen since purchase the insurer applies an MVA that reduces the amount paid out, because it must sell bonds at a loss to fund the withdrawal.
6. Advantages and Limitations
Advantages for individual investors: income security, ease of understanding, and potential creditor protection when a family-class or irrevocable beneficiary is named.
Limitations:
- Interest rate risk: buying when rates are low locks in a low payout for life.
- Inflation risk: level payments lose purchasing power.
- Risk of loss of capital at death: a straight life annuity pays nothing after death.
- Penalties: early termination or surrender of deferred annuities, and withdrawals, may be restricted or subject to an MVA; payout annuities usually cannot be cashed in at all.
A couple wants the highest possible monthly income while both are alive, and the wife has a large defined benefit pension of her own. Which joint annuity pays the most per month?
Joint and last survivor at 100%
Joint and last survivor at 60%
Joint first-to-die, which stops at the first death
Joint and last survivor at 100% with a 20-year guarantee
How does an insured annuity provide an inheritance even though the life annuity stops at death?
The annuity refunds the premium to the estate when the annuitant dies
A permanent life insurance policy on the same life, paid from the annuity income, pays a tax-free death benefit equal to the capital
The insurer converts the remaining annuity payments into a term-certain annuity payable to the heirs for 20 years
Assuris pays the heirs the original premium if the annuitant dies early
Teresa bought a 5-year deferred annuity (guaranteed interest) two years ago. Interest rates have risen sharply, and she now wants to withdraw the full value. What is the likely effect?
She receives the full accumulated value plus a bonus because rates have risen
The insurer applies a market value adjustment that reduces the amount she receives
She cannot withdraw at all, because every deferred annuity is fully locked in
Her withdrawal is converted automatically into a life annuity
Sections you finish are checked off in the contents.