2023-12-16 10:15:00
Mon Tuesday text on the new Desjardins product raised some questions that I would describe as “repressed”. Some people don’t understand anything, but they don’t dare say it. I’ve had a few thank you messages for the “good advice” (what advice?), but I’ve seen deep confusion in the same emails. I’ll take the blame.
The reader Denis did not thank me. He called my presentation “summary.” Small reminder: I write columns, not leaflets. “There is definitely a lack of a detailed example to get an idea,” he emphasizes dryly.
Don’t go spreading this to the competition, I’m going to tell you a secret, something of mine. So here it is: most of the time, I do it on purpose so that something is missing.
If I exhausted the subject each time, I would have covered it in less than six months, and I should have retrained as a writer of financial product prospectuses a long time ago. It’s much better paid than a columnist, it seems, but the public? Non-existent, inert at best.
On Tuesday, therefore, I announced that Quebecers’ favorite financial institution was the first to launch a deferred life annuity at an advanced age (RVDAA). I was waiting for this moment. Some readers find it very complicated. It’s not that much. We just need to take a step back.
First: understand the principle of an immediate life annuity. I hand over a large sum to an insurer who invests it in long-term bonds. The following month, he started giving me my money back in monthly installments. The institution will spread out the repayment of the amount I have entrusted to it and the returns more or less depending on my life expectancy. Along the way, obviously, it keeps a portion to cover its operating costs and increase its profit line.
If my death comes at the right time, I will have made a small return, and the company, its small profit.
If I were the insurer’s only customer, the insurer would lose money if I lingered at all in this world. But I’m not the only one who bought an annuity. In our group, there will be some who die prematurely. They will be in deficit with regard to the company, but the sums they leave on the table will be used to finance the services of those who defy mortality statistics. You can always take out certain guarantees, for example, payments for a minimum of 10 years. But the annuity will cost more.
It’s the opposite of life insurance, in mechanics. Policyholders pay premiums each year in exchange for a large amount upon death. The two activities present opposing risks for the insurance company, which allows it to protect itself. If the mortality rate among its customers is lower than expected, it will affect the profitability of its annuity operations, but it will improve that of the life insurance side.
In a risk distribution system like that of insurance, there are always participants who pay to absorb the misfortunes of others, without receiving anything in return. Temporary life insurance, home insurance, car insurance… We helmet to protect ourselves from a risk, and happy are those who do not have to claim. Who wants to die or see their house burn down?
What sets an RVDAA apart from an immediate annuity is that a more or less long period passes (5 to 30 years) before the insurer begins to deliver. This period allows you to accumulate returns. And because benefits will be paid over a shorter period, they will be higher. These should in principle take over from other incomes which are running out.
To avoid frightening the world, Desjardins guarantees the capital in its RVDAA, before and after the annuity is triggered. All that is at stake for clients, what they are likely to leave on the table in the event of premature deaths, is the returns that will be transferred to other annuitants.
This is not a big “longevity” insurance. If everyone gave up getting their money back after an early departure, RVDAA would cost much less for the same guaranteed income for life.
The reader named Germain asked me a question that I was hoping for. “What does the RVDAA have to do with delaying QPP and PSV benefits?” In my column, I only said that before considering purchasing a life annuity, we must postpone the two public benefits in exchange for a bonus. They are also paid for life, and what’s more, they are indexed, unlike most insurer annuities.
This is the basic protection against longevity risk, we improve this before taking out one with a private company.
I see the end of the column coming, and realize that I still don’t have a numerical example for Denis.
It will be for another time!
***
Flexibility of withdrawals from a CRI
I reported a few months ago that the Quebec government was going to lift the constraints on the maximum amounts that can be withdrawn from a locked-in retirement account (CRI) and its extension, the life income fund. (LIF).
The objective of this modification is to make life easier for retirees who would like to delay their PSV and their QPP. With the ability to draw without limits from your CRI, you can bridge the gap until the two public regimes are triggered.
Officially, this is not always possible. “But when?” asks Louis. The office of the Minister of Finance tells me that the draft regulation is in progress and should be completed soon. It’s a matter of weeks.
Voilà!
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