For Canadians nearing retirement, deciding how to manage their pension is a significant financial decision. Many retirees are faced with two main options: taking the commuted value of their pension or purchasing a copycat annuity from an insurance provider like Canada Life or Sun Life.
Understanding how these choices impact your financial security is essential, particularly in terms of protection offered by Assuris, Canada’s safety net for life insurance, investment & pension policyholders.
Let’s explore what Assuris does, how it protects Canadians, and why choosing a copycat annuity backed by Assuris offers peace of mind compared to managing the commuted value on your own.
- Automatic Protection: Assuris automatically protects all Canadians who purchase life insurance, annuities, or similar products from member insurance companies—no application or fees required.
- Income Stability with Copycat Annuities: Copycat annuities provide a guaranteed lifetime income, protected by Assuris, offering retirees peace of mind.
- No Assuris Protection for Commuted Value: If you take the commuted value and invest it yourself (e.g., in a LIRA), your funds are not protected by Assuris and are exposed to market and longevity risks.
- Assuris’ Role in Insolvency: If your insurer becomes insolvent, Assuris guarantees continued annuity payments and transfers your policy to a stable insurer.
- Guaranteed Peace of Mind: Assuris safeguards retirement income, ensuring retirees can enjoy financial security without worrying about unexpected disruptions.
What Is Assuris and How Does It Work?
Assuris is a not-for-profit organization that protects policyholders of life and health insurance companies in Canada. If a member insurance company becomes insolvent, Assuris ensures that policyholders continue to receive their benefits up to specific guaranteed levels. This protection applies automatically to policies purchased from member companies—policyholders don’t need to apply for coverage or pay an additional fee.
Key Coverage Highlights
- Death Benefit of a life insurance policy: Up to $1,000,000.
- Health Expenses: Up to $250,000.
- Monthly Income such as a copycat pension: Up to $5,000 per month.
- Investments/Savings: Up to $100,000 or 90% of the benefit amount, whichever is higher.
These guarantees provide a safety net, ensuring that Canadians relying on life and health insurance products are not left vulnerable in the event of an insurer’s failure.
Copycat Annuities vs. Commuted Value: What’s the Difference?
When retiring, many Canadians with defined benefit (DB) pension plans are given two options:
- Commuted Value: Take the lump sum of your pension’s current value and transfer it into a Locked-In Retirement Account (LIRA). This option gives you control over the funds but also exposes you to market risks. Plus, watch the tax hit on any non sheltered funds.
- Copycat Annuity: Transfer your pension to an insurance provider (e.g., Canada Life or Sun Life) in exchange for an annuity that mimics the benefits of your employer-sponsored pension plan. This option guarantees a lifetime income stream.
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Why Assuris Protection Is Crucial for Copycat Annuities
Protection for Monthly Income
Assuris guarantees that policyholders of member life insurance companies will receive up to $5,000 per month or 85% of the monthly income benefit, whichever is higher. For retirees opting for a copycat annuity, this means:
- If your insurer becomes insolvent, Assuris will step in to ensure your monthly pension payments continue.
- This protection ensures that your income stream is secure, no matter what happens to the insurance company.
Stability and Confidence
Insurance providers like Canada Life and Sun Life are typically very stable, but no financial institution is entirely immune to economic challenges. Assuris’ protection provides retirees with peace of mind, knowing that their annuity income is safeguarded even in the worst-case scenario.
Why the Commuted Value Lacks Assuris Protection
When you opt for the commuted value of your pension, you take on the responsibility of managing and investing the lump sum yourself. While this option offers flexibility, it comes with several risks:
- Market Volatility: Your investments are subject to market fluctuations, which can significantly impact your retirement income.
- No Assuris Coverage: Investment vehicles like Locked-In Retirement Accounts (LIRAs) or Life Income Funds (LIFs) are not protected by Assuris. If your investments lose value or if the institution holding your account fails, there is no safety net.
- Longevity Risk: Managing your funds effectively to last throughout retirement can be challenging, especially if you live longer than expected.
By contrast, a copycat annuity shifts these risks to the insurance provider, and Assuris’ protection ensures that even in the rare event of insolvency, your income stream is preserved.
Comparing the Options: Copycat Annuity vs. Commuted Value
| Feature | Copycat Annuity | Commuted Value |
|---|---|---|
| Income Stability | Guaranteed for life | Depends on investment performance |
| Assuris Protection | Yes – up to $5,000/month | No |
| Market Risk | None – insurer assumes the risk | Fully borne by the retiree |
| Longevity Risk | None – payments last for life | Retiree must manage funds carefully |
| Flexibility | Limited – fixed income stream | High – funds can be invested freely |
For most retirees, the guaranteed income and Assuris protection of a copycat annuity provide far greater financial security than the commuted value.
How Assuris Safeguards Your Retirement
1. Guaranteed Monthly Income
Assuris guarantees up to $5,000 per month or 85% of the promised benefit, whichever is higher. This ensures that retirees relying on annuity payments have a secure and predictable income, even in the unlikely event of insurer insolvency.
2. Savings and Investments
For policies with a savings or investment component, such as universal or whole life insurance, Assuris guarantees up to $100,000 or 90% of the benefit, whichever is higher. This provides an additional layer of protection for retirees with cash-value policies.
3. Automatic Protection
As long as your insurance provider is a member of Assuris (which nearly all Canadian life insurers are), you are automatically covered. There’s no need to take any action or pay additional fees.
Why Copycat Annuities Are the Safer Choice
For retirees prioritizing security and peace of mind, a copycat annuity offers clear advantages:
- Income Stability: Guaranteed lifetime payments ensure you never outlive your income.
- Assuris Protection: Automatic coverage protects your income stream even in worst-case scenarios.
- No Management Required: The insurance provider handles all the investment and longevity risks, leaving you free to enjoy retirement.
- Your pension is paid by a Cdn. financial institution, not a manufacturer.
Which Pension Option Should You Pick?
Deciding between a commuted value and a copycat annuity is one of the most critical financial decisions Canadians face when retiring. While the commuted value offers flexibility, it also comes with significant risks, including the lack of Assuris protection. By choosing a copycat annuity from a reputable insurance provider, you not only secure a guaranteed income for life but also benefit from the robust safety net that Assuris provides.
As you plan for retirement, consider the long-term implications of your decision. The security, stability, and peace of mind offered by Assuris-backed copycat annuities make them an ideal choice for Canadians seeking a worry-free retirement.
